After placing as one of the best-performing sectors for more than half of this year, the consumer staples sector has recently retreated. However, the Consumer Staples Select SPDR (NYSEArca: XLP) is down nearly 4% over the past month on concerns defensive sectors are overvalued and that higher-yielding sectors remain vulnerable to an interest rate hike by the Federal Reserve.
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.
In what could be some good news for investors, the staples sector has swiftly moved from overbought to oversold, potentially indicating a rebound is near.
“It only took about six weeks for North American consumer staples stocks to go from short-term overbought to short-term oversold. On July 20th, 88% of DM Americas consumer staple stocks were trading above the 50-day moving average. As of the end of last Friday, just 18% were trading above the 50-day moving average. This is the fewest number of stocks trading above the 50-day moving average since late January,” according to ValueWalk.[related_stories]
Predictably, one of the criticism of the staples sector is that the group looks pricey.
“By many valuation metrics, however, consumer staples are quite overvalued. As of May 23, 2016, the Consumer Staples Select Sector ETF had a trailing price-to-earnings (P/E) ratio of 21 compared to 18 for the S&P 500. Its P/E-to-growth (PEG) ratio of 2.5 tops the S&P 500’s 1.8,” reports Investopedia.