Why all signs point to a weak 2014 for this sector
Is it time for investors to exercise a bit of discretion?
The consumer discretionary sector has outperformed the market for the prior six years straight. And according to Carter Worth, the chief market technician at Oppenheimer, seven for seven is simply not in the cards.
"Conceptually, there is the problem that the sector has just completed a record sixth year of outperformance compared to the market," Worth said. "No sector's done that going back to the 1980s, and that in and of itself is a problem."
The technician points out that over the past five years, the consumer discretionary sector has doubled the performance of the S&P 500.
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"So one of the parts that comprises the whole is outperforming the whole by 2 to 1," Worth said on Friday's "Options Action." "You're talking about very, very serious outperformance."
According to Worth, this incredible trend "is not likely to persist."
And if that isn't enough to get the goat of consumer discretionary investors, Worth provides another reason to winnow down holdings of the sector: valuation.
Worth notes that price-to-sales, price-to-cash-flow and price-to-book-value metrics are all at just about all-time highs.
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On the other hand, the sector has certainly experienced impressive growth lately. In 2013, the sector expanded earnings by 8.8 percent according to FactSet—nearly double the S&P 500's 4.7 percent earnings growth, and enough to make consumer discretionary the market's second-best sector by that metric.
The consumer discretionary sector also enjoyed the second-strongest revenue growth out of the 10 sectors, at 4.9 percent.
Still, Worth says the sector's 40 percent rally this year more than prices in all the good news.
"Years of outperformance, expensive valuation, year-to-date the best performer," Worth sums up. "Buy, sell or hold? We sell."
Worth predicts a 10 percent selloff in the sector.