LIVE MARKETS-Animal spirits slump, US stocks struggle

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ANIMAL SPIRITS SLUMP, US STOCKS STRUGGLE

The S&P 500 index .SPX ended Tuesday at 6,617.32, which puts it down 4% from its October 28 record close, and down 4.4% from its October 29 record intraday high.

Meanwhile, traders are also watching the consumer discretionary / consumer staples ratio as another means of assessing just how robust animal spirits may be.

Trading action in consumer discretionary stocks can reflect confidence, or lack thereof, in the economy since companies in this group produce or sell non-essential items. On the other hand, staples' behavior can provide clues into just how defensive market positioning may be, since companies in this group produce or sell products that consumers cannot forgo even in tough economic times.

The ratio of the Invesco S&P 500 equal-weight consumer discretionary ETF RSPD.K to the Invesco S&P 500 equal-weight staples ETF RSPS.K hit a record high on September 29. It then put bulls on notice, by diverging into the S&P 500 index's October 28 record close.

Of note, this ratio showed a bearish divergence into the S&P 500's early-2022 then-record highs, and it exhibited a bullish convergence into the SPX's October 2022 trough.

The ratio diverged into the S&P 500's July 2023 high, its March 2024 high, and the February 2025 peak.

Of concern now, the SPX ended Tuesday at its lowest level since October 10, but the ratio ended at its lowest level since August 21.

That said, the ratio's rising 200-day moving average is not far below Tuesday's close. This long-term moving average did act as support in a number of instances since early 2023.

Bulls will want to see the ratio quickly stabilize, get back in gear to the upside with the SPX, and surpass its September high. A more protracted downtrend may leave the S&P 500 vulnerable to a much more significant reversal.

(Terence Gabriel)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)