Consumer Staples have been going up. Stocks like Costco, McCormick and Clorox have been ripping to new all-time highs. The Sysco in the Staples sector has even embarrassed Cisco in Technology. It’s been a nice run. The question here, however, is whether or not the strength in Staples is evidence of a flight to safety and whether we should be concerned about the overall market? This is a very important question and I want to walk you through my thought process.
First of all, the mere fact that Consumer Staples are going up in price is not, in and of itself, a bearish characteristic. In fact, stocks in the Staples sector rising in price is consistent with an environment where stocks are going up, and vice versa:
The more relevant factor here is the relative performance of Staples, rather than the absolute. Here we are taking the S&P500 as the numerator and Consumer Staples as the denominator to better show the relative strength, or weakness in this case, of the Staples. So Staples/S&Ps upside down overlaid with the S&P500 over time:
As stock market bulls, you’re rooting for Staples to go up in price, just at a slower rate than the rest of the market. When Staples are outperforming, you’re seeing evidence of a change in trend for U.S. stocks. This correlation has not always been the case, but you can’t argue that we’re not seeing that in today’s market environment with today’s weightings. Those have changed dramatically the past 30 years. So we’re concerned with today, not the correlations of the late 70s and early 80s, just to be clear.
So if we take a closer look at the longer-term chart of Staples relative to the S&P500, we’re now down to the 2007 lows, which took place a few months before the S&P500 put in its epic top in 2007. You can see how this ratio exploded higher throughout 2008. What’s even better is the lower high this ratio put in March of 2009, at the same time that the S&P500 put in its final low:
A similar divergence to what we saw in 2007 would be concerning, where S&Ps are making new highs, but the relative strength in Staples is simultaneously turning up.
So far, there is no evidence of a major turn. As you can see in the chart above, there is potential support here in this ratio from back in 2006-2007. It bottomed close to where we are today, and the S&P500 peaked. But remember, this is only potential support. Taking a closer look, here is the ongoing downtrend in the XLP/SPY ratio. This chart falling is consistent with US Stocks going up:
Price is making lower low and lower highs below a downward sloping 200 day moving average and momentum is in a bearish regime. There is nothing in this chart that would suggest we’re in an uptrend of any kind or that a significant turn is taking place. This meets all of our characteristics for a downtrend. Could this 2007 low end up turning as support? Yes. Absolutely. But there is no evidence whatsoever that it has.
I think this is a big chart we want to be watching. It’s served as a good signal before. I would combine this with many of the other things we’re watching, breadth, sector rotation and key price levels (most importantly), to determine if we want to err on the side of buying stocks or err on the side of selling them. It’s not just one golden signal or tool, it’s weighing all of the evidence and making a sound decision based on incomplete information.
We’re just here trying to do the best we can. I think the XLP/SPY chart helps us do that.