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.
Related: Sticking With Staples ETFs: Is it a Good Idea?
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.
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.
However, 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.
Related: Paying For Protection
“If we turn to momentum, we can see that 86% of DM Americas consumer staple stocks still have the 50-day moving average trading above the 200-day moving average. This will probably fall back in the coming weeks as prices consolidate, but it is a good indicator that the overall momentum of the group is positive,” adds ValueWalk.
For more information on the consumer sector, visit our consumer staples category.
Consumer Staples Select Sector SPDR
