The Consumer discretionary sector makes up about 3% of the TSX Composite index. The consumer discretionary index market cap is about 116 billion vs. the TSX composite, which is about 3.8 trillion as of August 22, 2008. Some of the Canadian companies you may be familiar with in the consumer discretionary index are Canadian Tire Corporation, CanWest Global Communications Corp., Cineplex Galaxy Income Fund, Cogeco Cable Inc., The Forzani Group Ltd., Magna International Inc., Rona Inc., Shaw Communications Inc. and Sears Canada Inc..

The consumer discretionary index closed at $91.61 on Friday August 22, 2008. The 52-week high was 128.04 on October 31, 2007 and the 52-week low was 79.88 on July 15, 2008. From the peak to trough the consumer discretionary index has dropped –36.5% vs. the TSX, which has –8.7% during this period. There has been a short-term rally of about 12% since the bottom on July 15, 2008. On August 5, 2008 the current price broke through the 50 day moving average at about $90 giving us an initial buy signal and broke through resistance on the upper end of the longer-term channel on August 8th. Since then, the price has come back to the upper end of the longer-term channel. We would want to see the price hold above this resistance level to feel confident there is enough support in a sustained rally.

Valuations are certainly attractive with the average P/E ratio at 11.89. In addition, the dividend yields are at 3.39% so it is attractive for value investors looking for above average yields. Especially when you compare it to bond yields. With lower valuations many of these stocks are looking attractive. Recently a combination of things has led to their recent rally. The lower Canadian dollar has helped companies like Magna improve its bottom line. In other cases, the drop in oil and materials has led to an expectation of lower costs and a shift to other sectors like consumer discretionary. Companies have been restructuring in anticipation of weathering the storm ahead. Consumer discretionary tends to suffer in tough times, however with lower valuations and higher dividend yields, there are some gems within the sector that can help you diversify your portfolio to reduce risk.

The technicals are currently pointing to buy. The fundamentals look good with select companies. With all the uncertainty in the news today about housing prices, the credit crisis, currency, commodities and energy swings, consider using this sector to diversify your portfolio. Companies with good valuations and higher dividend yield exist within this sector and can serve to reduce risk and fluctuations in your portfolio. Be selective and understand that it may be a while before macroeconomic conditions change enough to warrant an overweight position in this sector.