Welcome to this week’s edition of the weekly recurring ‘Portfolio Watch’, where we’ll once again take you through selected trades currently on our book. We’ll let you in on our reasoning behind, our conviction going forward, as well as examine both leaders and laggards. 

On Wednesday we entered two trades – one being a spread between XLY vs. XLP (Long consumer discretionary vs. short consumer staples). We did that in expectation of pause – or skip rather – from the Fed, which we anticipated would favor risk-taking and high-beta performance in a disinflationary environment. 

While this trade hints at boarding a running train, we think there might be another leg to the run-up short-term – especially as Powell and co. came through with the pause. Besides the beta difference, we find that well-off consumers may have more ample spending capacity as housing is still going strong while lower earners are still struggling to make ends meet. In addition, we think the spread is attractive relative to the existing exposure in our portfolio. Consumer Discretionary is THE sub-sector to be long if disinflation continues! So far, as everything seems to be up, our long side is performing but the short is not. Nonetheless, we still find conviction and stick to our guns.

Target: 2.55 S/L: 2.15 (borrow fee 0.3% annualized)

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Chart 1: Long discretionary vs. short staples (Pos.: XLY vs. XLP)