A Pivotal Moment for the Consumer Discretionary Sector

Key Points

• Consumer sentiment dipped for the first time in six months, with the University of Michigan's Index falling to 71.1.
• The XLY ETF has shown resilience by reclaiming key moving averages and holding above the $220 support level, maintaining its uptrend.
• Earnings from Amazon and Tesla, major holdings of XLY, are upcoming and could significantly influence the fund's future direction.

The consumer discretionary sector, represented by the popular Consumer Discretionary Select SPDR ETF NYSEARCA: XLY, has recently reclaimed key moving averages, signaling resilience in its ongoing uptrend. These developments come amidst a notable shift in U.S. consumer sentiment, raising questions about the sector's near-term trajectory.

Shifting Consumer Sentiment in the U.S.

While the XLY ETF has found support near its uptrend’s support zone and reclaimed critical moving averages, recent data paints a more cautious picture of consumer sentiment. According to the University of Michigan's Consumer Sentiment Index, sentiment dropped to 71.1 in January 2025, down from 74.0 in December, marking its first decline in six months. This dip underscores potential concerns about the economic environment and consumer behavior.

Supporting this narrative, retail sales growth in December came in at 0.4% month-over-month, falling short of expectations. Additionally, a slight rise in jobless claims to 223,000 as of January 18 suggests that while the labor market remains strong, caution is creeping into consumer decision-making.

Despite this, the sector's technical performance offers a contrasting perspective. From a technical analysis standpoint, the XLY ETF's positioning remains constructive, leaving investors with key questions about its outlook.

Technical Perspective: XLY Finds Support Amid Shifting Sentiment

The Consumer Discretionary Select Sector SPDR Fund tracks the Consumer Discretionary Select Sector Index, encompassing industries such as retail, media, hotels, leisure, apparel, automobiles, and diversified consumer services. Despite weakening sentiment indicators, the ETF recently tested its uptrend support near $220 and held firm.

Over the past week, the ETF has reclaimed its 20-day and 50-day simple moving averages (SMA) and has been consolidating above these levels. This behavior suggests the formation of a higher low within its broader uptrend, reinforcing the notion that the sector's technical structure remains intact.

However, a significant momentum shift could occur if the ETF fails to hold the $220 support level. A breakdown below this level would confirm a lower high within the uptrend, signaling a potential trend reversal. Such price action, combined with weakening sentiment, could warrant a more cautious, risk-off approach to the sector.

Earnings as a Catalyst: The Next 2 Weeks Are Critical

The trajectory of the XLY ETF may hinge on earnings reports from its two largest holdings, Amazon.com NASDAQ: AMZN and Tesla NASDAQ: TSLA, which together account for nearly 40% of the fund's weight. These earnings releases are expected to act as significant catalysts for the sector, potentially determining whether the ETF sustains its uptrend or breaks below key support levels.

Amazon Earnings: February 6

Amazon, the ETF's largest holding with a 21% weighting, is scheduled to report its earnings on February 6. As the world's largest e-commerce company, Amazon's results will provide critical insights into consumer spending trends, particularly during the holiday season.

Strong performance could bolster the sector's resilience, while weaker-than-expected results amplify concerns about the sustainability of consumer demand.

Tesla Earnings: January 29

Tesla, the ETF's second-largest holding with a 19% weighting, will report its earnings this week, on January 29, after the market closes.

As the leading electric vehicle manufacturer, Tesla's earnings will reflect its individual performance and offer insights into broader trends in discretionary spending and consumer confidence.

A Pivotal Moment for the Consumer Discretionary Sector

While the Consumer Discretionary Select SPDR ETF has maintained its technical uptrend, the sector faces potential challenges from declining sentiment and cautious consumer behavior. The $220 support level remains a critical line in the sand for the ETF. A break below this level could signal a broader trend reversal, aligning with weakening macroeconomic indicators.

The upcoming earnings reports from Amazon and Tesla will likely be decisive events, shaping the sector's momentum for the remainder of the quarter. Investors should monitor these developments closely, as they will provide valuable clarity on whether the ETF's uptrend holds or whether a more defensive stance becomes prudent.