We look at a lot of intermarket relationships and try to analyze the same things, but from different perspectives. It’s all part of the weight of the evidence approach that we so often preach. Today we’re focusing in on the relative strength (or weakness) in Consumer Staples as a heads up for the next move in the US Stock Market.
Consumer Staples are funny bunch. Think about it like this: regardless of how bad the economy might get, as a society we’re still going to brush our teeth, wash our dishes, smoke cigarettes and drink beers. Those are Consumer Staples. They tend to be less volatile and underperform when stocks in general are going higher, but outperform when stocks are selling off, for the same reasons.
This chart here really shows this powerful relationship. Normally when we look at relative strength, we like to put the asset or sector in question as the numerator. But to really see the high positive correlation, we flipped the ratio below so the S&P500 is the numerator and Consumer Staples are the denominator. So if the chart at the bottom is going up, Staples are underperforming, and if it’s going down, Staples are outperforming.
Click On Charts to Zoom In
Look at the divergences that signaled the tops in 2007, 2015 and 2018. Also look at the bullish divergence back at the 2009 bottom. The way I see it, if the S&P500 is really going higher, we need to see a breakout in the SPY / XLP ratio. This would represents a breakdown in Staples relative to the rest of the market, which is what normally happens when stocks are doing well.
If you’re in the bear camp (see the bear case here), then a break of the recent lows in the SPY / XLP ratio would be consistent with an environment where stocks are falling. Here is a closer look:
How do you see it? Are we going to break down to new lows? That’s probably happening at the same time that Small-caps and Transports are also breaking their recent lows as well.
I think based on the weight-of-the-evidence, the higher probability outcome is an upside resolution here and the resumption of the bull market in stocks. If we’re wrong on our assessment, we’ll know if/when this ratio breaks to new lows.