Amid fears of rising interest rates and concerns that the sector is overvalued even relative to its lofty historical norms, the consumer staples has recently encountered some headwinds.
Defensive sectors often trade at premium valuations relative to the broader market and that is certainly the case at the moment with the consumer staples and utilities groups.
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That does not mean investors should flee richly valued groups such as consumer staples and utilities. In fact, the case for these higher-yielding sectors could be getting a boost as bond markets are pricing in diminishing chances of the Federal Reserve boosting interest rates later this month while also reducing the odds of a September rate hike.
However, there is something else to consider with staples exchange traded funds such as the Consumer Staples Select SPDR (NYSEArca: XLP). That being weakness from a major staples sub-group, food stocks.
Setting the news aside and focusing on the technicals, we can see a break in the rising 2016 trend in the sector, with falling momentum and cumulative volume indicators and even a bearish crossover of short-term moving averages. That’s bad,” reports Michael Kahn for Barron’s. “However, it’s not lights-out bad. Based on the long-term chart, a 50% pullback of the 2016 advance would bring the index down to a nice support floor at last year’s high. It would also be near the long-term trend line drawn from the start of the bull market in 2009.”
XLP and rivals staples ETFs surged recently when Mondelez International (NasdaqGS: MDLZ), the company behind Oreo cookies and Cadbury chocolates, made a takeover bid for confectionery firm Hershey Co. (NYSE: HSY). However, Hershey has since rebuffed that offer.
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Rivals to XLP, which also have substantial exposure to food stocks, include the Vanguard Consumer Staples ETF (NYSEArca: VDC) and the Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA).
Regarding food stocks, “while the short-term trend is still negative, volume is now low enough to suggest everyone who wanted to sell shares has already done so. That sets the stock up for some good news — although in the absence of a technical reversal or final capitulation event, it may be premature to buy shares. Still, it is worth watching,” according to Barron’s.
For more information on the consumer sector, visit our consumer staples category.