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Every sentient market watcher is well aware of the huge upside we've seen so far in 2013. Just a little over seven weeks into the year, the S&P 500 index has posted a stellar total return of 5.6%, and that includes the big 1.24% drop on Wednesday, Feb. 20.
More impressive still is the total return in the consumer staples sector. These stocks, the kind that make the products everyone needs, have achieved a total return of 9.4% year to date as measured by the Consumer Staples Select Sector SPDR (NYSE: XLP).
It's a different story entirely, however, for consumer discretionary stocks. That sector, as measured by the Consumer Discretionary Select Sector SPDR (NYSE: XLY), is only up 5.6% so far in 2013. And while there's nothing wrong with a 5%-plus gain in a sector in less than two months, the underperformance of consumer discretionary relative to consumer staples should be viewed as a big red flag for traders considering positions, or holding positions, in the space.
So, just why has there been a lag for discretionary stocks?
Well, for one thing, consumers seem a bit reticent to embrace the mainstream financial media's proclamation that the economy is back on the recovery path. The mom and pop investors and individual traders I correspond with on a regular basis are actually quite bearish on the economy overall, although they've been bullish when it comes to the latest move higher in stocks.
Then there are the exogenous headwinds for discretionary stocks such as the recent 36-consecutive-day spike in the national average for gasoline. That's taken a bite out of discretionary spending, as has the realization that nearly every worker's paycheck is at least 2% smaller this year thanks to the fiscal cliff deal that hiked the payroll tax.
Still, consumer sentiment seems positive, at least as measured by the Bloomberg Consumer Comfort Index. That metric recently improved to minus 33.4 for the week ended Feb. 17. Last year, the index averaged a minus 38.3. Yet, as we've seen, that improvement hasn't been reflected as much in consumer discretionary stocks, and that tells me that the trade in this space is something you want to avoid. And you especially want to avoid the weakest of the weak consumer discretionary stocks.
To determine some of the weaker stocks in the space, I did a little performance research on the biggest losers year to date in the consumer discretionary sector. The table below contains 15 stocks that I think traders should avoid or sell now, as they represent some of the most unloved stocks in the consumer discretionary space.
* Returns as of midday trading Friday. Feb. 22.
If you are long any of these stocks, and particularly if you have a trading gain in any of them, now might be a very good time to sell and get out while you're in the black. That move will free up some cash, and allow you to rotate into sectors that are getting a lot more love from traders.
Once a pillar of the American economy, this group is crumbling, and investors would be wise to avoid the rubble.
After a solid run, the technical evidence tells us shares are headed for a quick drop.
This sector is one of the few showing real growth, and there is an undeniable upside catalyst on the horizon.