IS DECEMBER BUYING OF CONSUMER STAPLES SENDING A CAUTION SIGNAL FOR THE MARKET?
NEW SIGNS OF STRENGTH ... Yesterday I wrote about how the healthcare sector was starting to move up in the relative strength rankings. I mentioned that over the previous week, HC had moved into third place behind technology and consumer staples. One of our readers asked if new buying in HC and consumer staples was a sign of a more cautious stock market. Let's take a look. Chart 1 shows the Consumer Staples Select Sector SPDR consolidating above its 200-day moving average after recently exceeding its September peak. Its relative strength ratio (plotted against the S&P 500) shows a small rise during the month of December, but not enough to signal serious market leadership. The very fact that some money is starting to flow into the consumer staples, however, may be an early sign of caution among investors. That's because consumer staples are defensive in nature and usually do better when the market doesn't.
Chart 1
STUDY OF LAST THREE YEARS... Chart 2 shows the S&P 500 for the last three years. It shows the decline into the fourth quarter of 2002, the 2003 rally phase, the 2004 correction, and the recent upturn. Chart 3 plots a ratio of the Consumer Staples Select Sector SPDR (XLP) divided by the S&P. And, sure enough, the ratio does tell a story. Generally speaking, when the consumer staples/S&P 500 ratio is rising, the market doesn't do as well. A decline in the ratio is usually associated with a rising market. Chart 3 shows the ratio peaking during October 2002 just as the S&P 500 was bottoming (see green circles). The ratio declined throughout 2003 as the market rose. It bottomed at the start of 2004 (see red circles) as the market entered an eight-month downside correction. Which brings us to the present. To study that more closely, let's zoom in on the 2004 action.
Chart 2
Chart 3
2004 COMPARISONS... Charts 4 and 5 compare the consumer staple/S&P ratio with the S&P chart during 2004. Once again, they show an inverse relationship. The bottom in the ratio at the start of 2004 (see first red arrow) coincided with a peak in the S&P. The August peak in the ratio (see green arrow) coincided with an upturn in the S&P 500. To signal the S&P may be nearing a top, the ratio has to turn up convincingly. So far it hasn't done that. The fact that the ratio is starting to bounce off potential chart support at its early 2004 bottom (see red circles), however, is an early warning that this is logical spot for the ratio to start rising. That may not have much significance over the short run. But the ratio does bear close watching as we move into the January time frame. The fact that money is starting to flow into the more defensive consumer staples and healthcare sectors may be an early sign that investors are beginning to sense that the fourth quarter rally may not have much more room to roam.
Chart 4
Chart 5
PROCTER & GAMBLE IS TODAY'S STAPLE LEADER... Nowhere is the buying of the consumer staples more evident that in today's strong move by Procter & Gamble. The stock is trading at the highest level since mid-September. Its relative strength line is also starting to climb for the first time in three months (see blue arrow).
Chart 6
THREE MORE STAPLE LEADERS ... The next three charts show more stocks in the staples group that have been percentage leaders over the last week. Brown-Forman bottomed in late October and is trading at a three-month high. Its RS line has started to rise. Colgate Palmolive has been one of the leaders over the last week as well. Notice the recent jump in its RS line. Kroger is just now breaking through its 200-day average. Notice the recent bulge in its upside volume and the upturn in its RS line. It's possible that these large multinational consumer staples companies may finally be getting some benefit from the recent weakness in the U.S. Dollar. It also suggests that some money is rotating out of former leaders (like basic materials) into former lagging sectors like consumer staples and healthcare.
Chart 7
Chart 8
Chart 9
