CONSUMER STAPLES AND ENERGY ARE TOP PERFORMERS FOR 2005 -- TECHNOLOGY IS THE WORST -- THAT'S NOT GOOD FOR THE REST OF THE MARKET -- HOW TO SPOT STAPLE LEADERS

JANUARY 2005 RELATIVE PERFORMANCE ... The performance bars shown in Chart 1 plot the relative ranking of the nine market sectors since the start of the new year. The sector bars are placed in descending order through last evening (Tuesday). Starting from the left, the only two sectors in the black are consumer staples and energy. Utilities, healthcare, and financials are down for the month, but are doing better than the S&P 500. Starting from the far right, the worst sector is technology which is followed by industrials and materials. Technology underperformance is a caution flag for the market. So is leadership by consumer staples and energy. Energy leadership is associated with rising oil prices which isn't good for the market. That's when nervous money starts moving into the defensive consumer staples. That's why leadership by those two sectors is normally associated with a weaker market. In the strong energy sector, oil service is the top industry group during January (+1.3%). Within a weak technology sector, semiconductors are the weakest industry group (6.9%). I've already written about how oil service strength, and semiconductor weakness, isn't good for the market either. The performance bars also show why my recent commentary has been favoring consumer staples and energy. Let's take a closer look at consumer staples.

Chart 1

CONSUMER STAPLES SPDR TESTS 2004 HIGH... Chart 2 shows the Consumer Staples Sector SPDR (XLP) trading at the highest level in six months while the rest of the market is falling. The chart also shows the XLP challenging its June intra-day high at 23.56. The relative strength line along the bottom shows the recent reversal of fortune in this defensive group. The RS line (versus the S&P 500) started dropping sharply during August (see first arrow) as the rest of the market started its yearend rally. The staples RS line has been rising during January (second blue arrow) as the rest of the market has weakened. The rising RS line since the start of the new year confirms the performance numbers plotted in Chart 1. Chart 3 shows another Consumer Non-Cyclical ETF (IYK) already trading at a new high. Its relative strength line has been rising since November. What's holding the Consumer Staples SPDR (XLE) back is the fact that Wal Mart is its biggest holding and hasn't been doing much on the upside. [Wal Mart isn't included in the IYK]. As a result, the XLP shown in Chart 2 probably understates the strength in the consumer staples.

Chart 2

Chart 3

CONSUMER STAPLE LEADERS DURING 2005... Last week I wrote about finding the strongest stocks in the strongest groups. You can do that by using the Stockcharts.com Market Carpets. Go to the S&P Sector Carpets and click on Consumer Staples. The individual boxes will show you the main stocks in that sector. The greener the box, the stronger the stock. The redder the box, the weaker the stock. The five top percentage gainers are listed in the box to the right. Today, for example, Pepsi (PEP) is one of today's top staple winners. By clicking on the PEP box, you can see a chart of the stock. The chart below shows PEP hitting a six-month high today. Its RS line has just started to jump as well. That's today. By moving the slider under the carpet to the left, you can go back as far as 45 days to see which stocks have been the strongest performers over the last week or the last month. For the last week, for example, one of the top staple performers was Conagra (CAG). Chart 5 shows CAG breaking out to a new 52-week high. Its RS line turned up a month ago.

Chart 4

Chart 5

2005 STAPLE LEADERS ... Since Chart 1 shows consumer staples in the top spot since the start of January, let's see which staple stocks have done the best during that time span. The five top percentage gainers are Walgreen (11%), Avon Products (8%), General Mills (5.2%), CVS (5%), and Alberto Culver (4.6%). Over the last couple of weeks, I've shown charts of four of them. WAG, GIS, and CVS have hit 52-week highs since the start of the year. The monthly bars in Chart 6 show that General Mills has just broken out to a new all-time high. The trick is to spot leaders like that earlier in their move. Back on December 14, I posted a Market Message which talked about why it was time for consumer staples to start showing new leadership (December 14, 2004). One of the paragraphs was headlined "General Mills is Popping". The stock was trading at 48.52 that day. It's trading today at 52.28 (+7.6%). And that's in a falling market. The moral of this story is that there's always something going up. What I try to do is find a sector that's showing market leadership (like consumer staples) and then find the strongest stocks in that group. To me, strongest means good relative strength combined with a bullish chart pattern. There are several of those in the consumer staples group.

Chart 6