Consumer stocks: The best is yet to come, Strategas' Verrone says

Whenever skeptics talk about why the market may decline, they often cite a weak consumer as the number one reason for a downdraft. With the Consumer Discretionary Sector (XLY) leading the S&P 500 (^GSPC) higher this year, a weak consumer could change the market landscape rather dramatically.

In fact, many bears believe the sector is played out and it’s the sector most likely to lead the market lower. Research from Strategas, however, suggests conventional wisdom is wrong and anyone betting against the consumer won’t be terribly happy six months from now.

“Trends are getting better, not worse,” said Chris Verrone, head of Strategas technical analysis. That may seem hard to believe, but, according to Strategas, 80% of consumer stocks are currently in an uptrend as compared to 60% just 6 months ago.

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Largely, Verrone said the uptrend stems from lower prices at the pump. Although filling your gas tank may cost a little more than it did a few weeks ago, it remains substantially lower than it was six to eight months ago.

“And six to nine months is the magic number. Our research shows that after oil declines it takes about six to eight months before consumer stocks respond; that’s because it takes a while for consumer behavior to adjust to the new reality – they have a little more money in their wallets.”

In turn, spending spikes. Digging into the sector, Verrone said results from the autos, hotels, cruise lines and even homebuilders are all starting to reflect the strength. “Internally the consumer discretionary group is growing stronger.”

If you’re looking to put money to work in the sector, Verrone has a few single stock ideas. In autos, rather than the car makers, he suggests a long position in Goodyear Tire (GT); it not only benefits from consumers being able to afford new tires, lower oil also lowers their input costs. Verrone is also bullish on auto parts maker Johnson Control (JCI). “We also like the homebuilders,” he added. “Lennar (LEN) and DR Horton (DHI) are two names that have done nothing for the last two years but the trend is in their favor. It looks like they are coming out of their bases.”

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