Conventional wisdom holds that in a veracious bull market, defensive consumer staples stocks and exchange traded funds will be laggards.
That was the case last year when the Consumer Staples Select Sector SPDR (NYSEArca: XLP) offered up a market-lagging 26.2% gain, one that was good to rank the ETF fifth among the nine sector SPDR funds. Investors should keep an eye on recent momentum in the staples sector and the S&P 500’s relative strength against the sector.
Since the start of February, XLP and the Vanguard Consumer Staples ETF (NYSEArca: VDC) have performed inline with the S&P 500 after lagging to start the year. In January, the two staples ETFs lost an average of 4.1% while the S&P 500 dropped 2.6%. The staples rebound could be an important tell.
“At the end of last wee the momentum indicator registered at 70.11, a few hairs above ‘overbought’ status which means we do not have a divergence just yet. Over the last 15 years we have not see the RSI indicator break above 70 and not eventually create a divergence. However, it’s important to recognize that a data series with just four inputs is by no means robust and history is not required to repeat itself,” writes technical analyst Andrew Thrasher.
Previous occurrences S&P 500/XLP negative divergence highlighted by Thrasher include 2000, just before stocks would tumble at the hands of the tech bubble. The scenario repeated again in 2004 and 2007, the latter of which took place not long before a market top that gave way to an epic bear market.
While staples strength is not always a guarantee of looming market weakness, it is worth noting that XLP and VDC are each up 1.5% this month compared to a 1.2% gain for the S&P 500. That is relevant because XLP is historically one of the worst-performing SPDRs in March. [Ides of March for Staples ETFs]
Also worth noting is XLP’s out-performance of the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) since the start of March. The staples ETF has been twice as strong as its discretionary counterpart, an important scenario to monitor as well because the XLY/XLP ratio is used by some traders as a gauge of overall market health. [Discretionary, Staples Divergence a Positive Sign]
The good news is XLY has consistently outperformed XLP in recent months, indicating the XLY/XLP ratio’s bullish trend is still in tact.
Consumer Staples Select Sector SPDR
