(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Consumer discretionary giants McDonald's Corp. (MCD), Home Depot Inc. (HD), and Nike Inc. (NKE) may be facing declines to start off 2018 as the group's spectacular run maybe showing signs of fatigue.

The Consumer Discretionary Select Sector SPDR (XLY) is showing signs of slowing down, using technical analysis. Shares of Home Depot could be facing a pullback of up to 15 percent, while Nike could be facing losses of nearly 10 percent. 

The Consumer Discretionary ETF has risen by nearly 8 percent since November 9, beating the S&P 500 Index by almost four 4 percentage points during that time. But the technicals are beginning to show signs of reversing as the chart below shows, that volume has been falling over the past couple of weeks.

Additionally, the relative strength Index is in overbought territory near 80. A reading above 70 is considered to be overbought. Also, the RSI has been falling with volume, as the price of the ETF has continued to rise – a divergent, bearish indicator. A mild pullback would take the ETF to around $96.25, a decline of about 3 percent. But if support at $96.25 does not hold, a more significant 7 percent decline to $92.50 seems possible. 

 

 

Nike

In an article in Investopedia on November 13, we discussed a Nike breakout and the stock's potential to rise to nearly $66. Now, the sporting apparel maker appears set to fall, as shares have reached overbought levels with an RSI of almost 75 while hitting a technical resistance level around $65.50 as of December 21. That is setting the shares up for a decline of about 10 percent to $59. However, the longer-term breakout in Nike is likely still in place, and a pullback is likely to be just shorter-term. 

 

 

Home Depot

Home Depot is up nearly 15.5 percent since November 9, and has an RSI reading of roughly 75, again indicating it is overbought. The RSI has started trending lower, while the stock has been rising in a divergent bearish sign.

The stock could see a pullback to around $160, a decline of 15 percent. There are two strong areas of support on the chart at $159.50 and $163.50 while having a strong long-term uptrend in place, keeping a longer-term positive outlook on shares.

 

 

McDonald's

McDonald's also appears to be facing declines after having a big 2017, as the RSI on the stock is diverging from the rising stock price. Although the reading of 53 is not signaling overbought levels, it has been steadily falling over the past 6 weeks while the stock has been rising. This suggests a pullback of about 5 percent to approximately $160.

 

 

Consumer discretionaries have been a hot sector in 2017 but may be headed to a temporary cooling-off period. But the long-term outlook still looks positive. 

 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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