Defensive consumer staples sector and related exchange traded funds have outpaced the broader markets this year, but some argue that the conservative play is beginning to look a little frothy.
Carter Worth, chief market technician at Sterne Agee, argues that the outperformance in consumer staples is dangerously unsustainable, reports Alex Rosenberg for CNBC. [ETF Chart of the Day: Soaring Staples]
“In principle, this kind of behavior is a fear-based approach to markets,” one that occurs “when people don’t like what they see, but have to be long—big pension plans and so forth—and they do so defensively. But usually it comes to an end,” Worth said on CNBC.
Specifically, Worth points out that “the strength of the last six or eight months has taken us well above these well-defined lows and highs of the channel.”
Consequently, investors could see a pullback to bring the sector back in line with the historical range.
“Mean reversion is a powerful principle,” Worth added. “To overshoot this, by all accounts, implies that there will be some revisiting of the top of the channel, which is about a 10-percent move lower from here.”
Along with the warning signs on technical chart analysis, Worth also points out that valuations within the sector are also beginning to look expensive.