WHY IT'S TIME FOR CONSUMER STAPLES TO START SHOWING LEADERSHIP -- THEY FOLLOW ENERGY -- HEALTHCARE IS ALSO TURNING UP
ENERGY AND THEN STAPLES... Market sectors have a tendency to show market leadership in a certain order. They don't always follow the order exactly, but there is a strong tendency not to get too far out of line. Chart 1 shows the "ideal" order during an economic cycle. The red line is the stock market and the green line the economy. [The market usually turns before the economy at tops and bottom]. During an upturn, leadership rotates to Cyclicals, Technology, Industrials, Basic industry (Materials), and Energy. All of those groups have shown leadership at one time or another since this cyclical bull market started near the end of 2002. During 2004, two of the main leaders were Basic materials (Industry) and Energy. Although their long-term trends are still up, both sectors have slipped in the relative strength rankings during the fourth quarter. At the same time, Staples are moving up in the rankings. The diagram shows that "Staples" are the next in line after Energy. The reason for showing the diagram is to make the point that there's some economic logic behind the recent rebound in the Consumer Staples sector that I've been writing about. For one thing, it may be a sign that market leadership is rotating toward groups that are more resistant to rising interest rates.
Chart 1
STAPLES HITTING NEW HIGH ... Chart 2 shows the Consumer Staples Select Sector SPDR hitting a new six-month high today. Its relative strength ratio along the bottom is just starting to turn up from chart support formed at the start of 2004 (see blue arrows). On December 9, I showed this chart to make the point that leadership by Consumer Staples is usually associated with a weaker market (December 09, 2004). That's what happened at the start of this year when a sharp upturn in the Staples/S&P ratio preceded a downturn in the rest of the market. Fortunately, the recent upturn in the ratio has been relatively modest and not enough to send off a serious market warning. If the ratio does start to rise more sharply, however, that may be a sign that the clock has started ticking on this cyclical bull market. That's no reason, however, not to participate in the early stages of this apparent rotation into Consumer Staples.
Chart 2
KROGER IS ONE OF TODAY'S STAPLE LEADERS... Last Thursday, I showed Kroger as it was breaking through its 200-day moving average and highlighted it as a potential leader in the staples group. It's one of today's top percentage gainers in the group. Its daily chart shows it trading over its high formed in early September which is a sign of strength. Its relative strength line has also jumped to a three-month high. That's pretty symptomatic of new buying in this group during the month of December. But it gets better. The weekly bars in Chart 4 show that KR has broken its 2004 down trendline on heavy volume, and appears headed toward its early 2004 high near 19.5. The weekly RS line also appears to be turning up. There's more. The monthly bars in Chart 5 show the stock moving up to challenge a six-year down trendline just over 18. The longer a trendline has been in existence, the more significant it becomes. That's why a decisive close over that line would be significantly bullish.
Chart 3
Chart 4
Chart 5
GENERAL MILLS IS POPPING ... General Mills is another staples standout. Its daily chart shows it climbing to the highest level in seven months today. Its relative strength line, although not terribly impressive, has turned up since the start of December when the rotation into this group seems to have begun. The weekly bars in Chart 7 put the stock in better long-term perspective. And they have a bullish look to them. The two converging trendlines since the start of 2002 look like a potential "symmetrical triangle" which would be a bullish pattern. That's why a decisive close above the upper resistance line could have bullish longer-term implications. The turns in its weekly relative strength line are also instructive. The RS line turned up during 2000 as the rest of the market was peaking (see first blue arrow) and peaked during the fourth quarter of 2002 as the market was bottoming (second blue arrow). It's a little too soon to say that the weekly RS line has bottomed (third arrow) -- although I suspect that it has. That would carry even more good news for the stock. A couple of staple leaders that I showed last week -- Campbell Soup and Sara Lee -- also had strong showings today.
Chart 6
Chart 7
HEALTHCARE ETF EXCEEDS 200-DAY LINE... Another 2004 laggard is getting better and that's healthcare. Chart 9 shows the Health Care Select Sector SPDR (XLV) closing over its 200-day average for the first time since July. It's RS line is also starting to show a little December leadership (see blue arrow). It's worth noting that with the S&P 500 rising to a new three-year high today, Consumer Staples and Healthcare were the two top sector gainers. It seems a bit unusual to have two traditionally defensive sectors leading the market to new highs. Whatever message the market is sending, our job is to follow the money flow. Right now the money is flowing into Consumer Staples and Healthcare. Both groups also appear to provide a relatively low-risk way of riding a maturing bull market into the new year. And, if the diagram in Chart 1 is right, it's time for defensive stocks to start show some leadership.
Chart 8
