Weakness In Staples Is Bullish For Stocks

JC Parets
June 7, 2020

Do you know when stocks making new 52-week relative lows is actually bullish? When we're talking about Consumer Staples.

You see, when the market is falling apart, you're going to see a sympathy bid, specifically on a relative basis, into Consumer Staples. In other words, no matter how bad things get, we're still going to drink beers, smoke cigarettes, brush our teeth and wash our dishes. Those things won't change. We call them Staples.

On the flip side, when stocks are doing well and the major indexes are in uptrends, or bull markets if you want to call them that, Staples are going to underperform. Their safer-haven status and lower beta components tend to lag during the good times.

You can see that here:

Click on Charts to Zoom in

See how close these two trade? When the black line below is going up, Staples as underperforming. When it goes down, Staples are outperforming. When the S&P500 is falling apart, Staples shine. And, of course, the opposite is also true.

So when I see Consumer Staples breaking down to new 52-week relative lows, what does that mean to me?

It means the market is probably in good shape.

Our Bull Market Checklist confirms that as well.

If Staples remain weak, particularly on a relative basis, that's consistent with stocks in general doing well. Staples making new lows is the type of thing we normally see in an environment where we should be spending our time looking for stocks to buy vs spending that time looking for stocks to sell.

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For a slightly different perspective, the Consumer Discretionary vs Consumer Staples Ratio also provides great information. With the high correlation between Discretionary stocks and the overall market, you're going to get a similar picture as the charts above. Discretionary stocks (aka Amazon) are companies where we spend our discretionary income: Autos, Retailers, Homebuilders, etc.

Look at the breakout. This ratio is now flirting with all-time highs. Historically, that's not a bearish characteristic for the stock market.

What do you think?

What am I missing here?

JC

 

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