Consumer discretionary sector may be messenger about OPEC

OPEC headquarters in Vienna.
Patti Domm | CNBC
OPEC headquarters in Vienna.

Consumer discretionary stocks and crude oil have been trading the way they normally do when OPEC is about to cut production.

Even though some of the 12 member nations are calling for production cuts, it's not actually clear whether the Organization of the Petroleum Exporting Countries will announce cuts at its Thursday meeting. There is no consensus on Wall Street about what the cartel might do and analysts are divided.

But the consumer discretionary sector has been acting the way it most often behaves when a cut is in the cards, according to data provided by Kensho, a quantitative analytical database used by hedge funds. Consumer discretionary is the sector often expected to win from falling oil prices—and the resulting drop in gasoline prices.

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Two months ahead of 11 of the past 13 meetings where OPEC cut production, the Consumer Discretionary Select Sector ETF XLY has gained an average 5.8 percent. In the two months ahead of this Thursday's meeting, the XLY is up 7.8 percent.

The solid gain in XLY ahead of meetings with production cuts contrasts sharply with the behavior of XLY before all OPEC meetings.

When looking at XLY ahead of all OPEC meetings held since the ETF started trading in early 1999, it was up 59 percent of the time for an average gain of 0.7 percent. The consumer discretionary ETF, in the month after the production cut meetings, averaged a loss of 0.3 percent but was positive 72 percent of the time.

There were only two times that OPEC cut when consumer stocks were not higher ahead of the meeting, and that was during the depths of the 2008 financial crisis when the stock market was spiraling lower.

Looking separately at some consumer names, Target over the course of the 13 meetings with cuts was up an average of 11.3 percent and was positive 92.3 percent of the time in the two-month period ahead of the OPEC production cut meetings, and McDonald's was up an average of 7.4 percent and was positive 92.3 percent of the time. Nike was up an average of 8.7 percent and positive 84.62 percent of the time.

All of these stocks have been strong over the past month, and Nike hit an all-time high in November.

As would be expected, West Texas Intermediate crude futures were lower by an average 6.4 percent in the two months leading up to the production cut meetings. Ahead of 13 of 15 meetings where production was cut, going back to 1998, WTI traded lower 77 percent of the time.

Oil traders increase bets on OPEC action

However, oil stocks behaved differently than oil. Since it was created in 2001, the Market Vectors Oil Services ETF OIH traded higher in the two months ahead of OPEC meetings with production cuts, trading higher 75 percent of the time with an average gain of 2.7 percent. The Energy Select Sector SPDR Fund XLE was also slightly positive nearly 73 percent of the time on average, with a gain of 2.1 percent.

In the two months ahead of this week's OPEC meeting, energy stocks, as represented by ETFs, did not trade in the most common pattern ahead of a cut. For weeks ahead of Thursday's meeting, Saudi Arabia had indicated it did not want a production cut, a negative for oil and oil stocks.

OIH has been down 9 percent in the past two months and XLE was down more than 2 percent. Selling in these ETFs usually comes after the meeting where there is a cut.

Historically, in the first month after OPEC production cut meetings, OIH has declined 78 percent of the time with an average loss of 6.9 percent, and XLE was lower 54.5 percent of the time with an average decline of 1 percent. Oil futures, however, rose an average 2.3 percent and were positive 69 percent of the time in the month after the meeting.

Disclosure: CNBC's parent, NBCUniversal, is a minority investor in Kensho.