Did you see Consumer Staples go out at new multi-year relative highs yesterday? The strength is in Staples, not in Banks or Industrials, for example, which keep making new relative lows.
So why should we care?
“JC, no one cares about staples, why does this matter?”
Well, as it turns out, Consumer Staples relative strength is one of the most reliable indicators of market strength and weakness that exists. You see, when stocks are doing well, Consumer Staples tend to underperform the rest of the market. When stocks are doing poorly, Staples are the leaders.
Think about it. No matter how bad the economy gets, we’re still going to brush our teeth, wash our dishes, smoke cigarettes and drink beer right? As a society, I mean. Well, those are consumer staples. This is the group of stocks that outperforms as stocks fall, which makes perfect sense.
Here is the chart of Staples breaking out to new multi-year highs relative to S&Ps:
Here is a look at this correlation longer-term. Notice how when S&Ps make new highs, but staples do not confirm, we’re at turning points (07, 15 & 18 & 20). We’re currently looking for something similar to 2009, where you can see S&Ps making new lows, but Staples already underperforming:
Here is a closer look at this. Remember the S&P500 here is the numerator and Staples are the denominator, just so it matches up with the direction of the S&P500. Just think about this as Staples Relative Strength, but upside down. As you can see here, that former support in the ratio in 2018 & 2019 turned into resistance, which is classic polarity that we’re taught on the first day of technical analysis kindergarten:
Look in this chart below how Staples started to outperform the day the Tech bubble popped in March 2000:
Then notice how in 2002 Staples started to underperform as soon as stocks bottomed!
Here is what it looked like before and after the financial crisis. Again, Staples started to outperform as stocks were topping in 2007, and then started their underperformance once stocks bottomed in late 2008-early 2009:
One thing I’d like to point out about this 08-09 period was that Staples were already underperforming before stocks bottomed out, one of the many divergences at that time pointing to a strengthening stock market.
Other signals were fewer and fewer stocks hitting new lows in January/February 09 compared to the prior quarter. Fewer stocks were showing bearish momentum characteristics with those new lows in the indexes. And Staples were already underperforming.
We’re looking for similar signs today. But to be clear, we have not seen any of those things. Like, none at all….
I think it’s important to understand the internals of the market and what changes in trend look like. Mathematically, the stock market cannot go higher without an expansion in stocks making new highs. In order for more stocks to make new highs, fewer stocks need to make new lows. That’s just basic arithmetic. But I know for a fact, that these simple principles get lost in the noise of the fed, the virus and all the cartoon networks shouting at each other all day.
Let’s remember how markets work.
For stocks to go up, fewer have to be going down first.