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

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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.