The last two times this 'classic late-cycle activity' emerged, a recession soon followed

A disconnect between the best- and worst-performing sectors this year is raising a note of caution to some market watchers.

Recently, the degree to which the 2018 market-leading consumer discretionary sector is outperforming the biggest laggard, consumer staples, has reached extremes, said Larry McDonald, editor of the Bear Traps Report.

He recently flagged this development as a warning sign to his clients. Here are his reasons why.

• Consumer discretionary stocks are surging this year, led by names like Netflix and Amazon. The group's outperformance relative to the staples, down more than 11 percent this year, is currently near two standard deviations outside the average for the past 30 years.

• Typically, this action emerges within one year of a recession; a similar development appeared ahead of the 2000 recession and the financial crisis. Consumer staples has suffered this year as interest rates have risen from historically low levels.

• This kind of behavior is ultimately unsustainable, and one relationship investors should consider monitoring.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

Read more

Connect