A Hard Lesson in Indexing: zulily Versus Consumer Discretionary Select Sector SPDR ETF

I have already written a mea culpa on zulily, Inc. (ZU). However, I feel that my trade on this stock was so bad, it deserves a SECOND one… especially since as I write, the stock is down about 8% in what looks like continuation selling from November’s post-earnings breakdown and gap down. The stock is apparently responding to a negative analyst report claiming that new customer activations have slowed.


Zulily continues to disappoint with continuation selling
Zulily continues to disappoint with continuation selling

As a reminder, back in July, I offered up ZU as a way to play seasonal strength in the consumer discretionary sector for the second half of the year. At the time, I thought ZU was starting to form a nice, consolidative base as a recovery from the expiration of its IPO lock-up period. That base developed for the next four months until the big breakdown. Meanwhile, the index I should have directly bought, Consumer Discretionary Select Sector SPDR ETF (XLY) first rallied and out-performed. Next, ironically enough, XLY greatly underperformed as it sold off with the rest of the market in September and October. While I used this opportunity to bullishly buy into the dip with ProShares Ultra S&P500 (SSO) shares, I completely failed to go after XLY.


Consumer Discret Sel Sect SPDR ETF (XLY) comes back strong just in time to print a seasonally strong second half
Consumer Discret Sel Sect SPDR ETF (XLY) comes back strong just in time to print a seasonally strong second half

I find it further ironic that SPDR S&P Retail ETF (XRT), a more focused and targeted play on consumer discretionary that conceptually includes ZU, outperformed XLY over mst of the entire second half.


SPDR S&P Retail ETF (XRT)  outperforms Consumer Discret Sel Sect SPDR ETF (XLY)  through most of the second half
SPDR S&P Retail ETF (XRT) outperforms Consumer Discret Sel Sect SPDR ETF (XLY) through most of the second half

Source for charts: FreeStockCharts.com

The lesson here is simple: when setting up a trade to profit from a pattern in an index, trade the index directly! Do not focus in on one member of that index or, even worse, focus just on a stock within the related sector. I learned this lesson in 2012 with T2108 (the percentage of stocks trading above their respective 40-day moving averages) and the S&P 500 (SPY). Unfortunately, I did not apply that same lesson in this case. It is certainly OK to make a more focused trade, but it has to be a small part of the larger index-related trade.

Lesson learned (again).

In the meantime, I am continuing to wait out the pessimism on ZU and see whether the company can make amends in its next earnings report. If not, I will have to let it go…

Be careful out there!

Full disclosure: long ZU

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.