RECENT BUYING OF CONSUMER STAPLES SUGGESTS A MORE DEFENSIVE MOOD -- THERE ARE SEVERAL WAYS TO PARTICIPATE -- CONUMER INDEX NEARS RECORD HIGH

TWO DIFFERENT VIEWS ... Last week I wrote an article on sector rotations that suggested that consumer staples were now due to show market leadership. They were in fact the strongest sector last week. Chart 2 gives two views of the group. The black line is the S&P Consumer Staples Sector Index ($SPST). Notice that it's now trading at the highest level in seven years and appears to be breaking out of a huge consolidation pattern that's existed since the end of 1998. The red line is the Consumer Staples Sector SPDR (XLP). It has just reached a new four-year high. The point of this article is twofold. One is to show that the group is starting to look stronger both on an absolute and a relative basis. The other is to show that not all consumer staple charts are equal. You'll notice, for example, that the XLP is much lower than the $SPST. I'll show why that's the case. I'll also show an alternative fund that covers this field.

Chart 1

CONSUMER STAPLES ARE DEFENSIVE ... The next two charts are designed to show why consumer staples are considered to be defensive and to put their performance in some perspective. The black line in Chart 2 shows the SPST rallying to a new 52-week high. The red line is a relative strength ratio of the SPST divided by the S&P 500. Notice the sharp jump in the RS line over the last week. It's not enough to break the downtrend in the RS line that's lasted for more than three years. But it is enough to start paying closer attention to the group. Chart 3 shows why. It's a ten-year look at the S&P 500 (monthly bars) overlaid with the relative strength line for the staples group. You'll see that the consumer staples RS line generally moves in the opposite direction of the S&P 500. Consumer staples were out of favor in the latter stages of the 1990's bull trend. They came back into favor starting in 2000 when the market peaked and stayed in favor until the market bottomed at the end of 2002. Staples have underperformed throughout the S&P 500 bull market that's lasted over three years. That means that a resurgence in the relative performance of the group is an early sign that investors are starting to get defensive.

Chart 2

Chart 3

WAL MART WEIGHS ON XLP... The weekly bars in Chart 4 show the Consumer Staples SPDR (XLP) trading at a new four-year high. It RS (red) line is bouncing but still in a downtrend. I believe that one of the reasons why the XLP is trading at lower levels that the S&P Consumer Staples Sector Index (SPST) shown in Chart 1 has to do with Wal Mart. The XLP gives Wal Mart a high weighting of 10% which, in my opinion, is too high. Chart 5 shows that Wal Mart has been and continues to be a weak performer. By contrast, the SPST gives Wal Mart a much smaller weighting (3.8%) which is in line with most of the other consumer stocks. Although I generally favor the use of Exchange Traded Funds for sector trading, there are sector mutual funds that also cover this category and, in some cases, may be a better choice than the XLP.

Chart 4

Chart 5

RYDEX CONSUMER PRODUCTS BREAKS OUT ... Chart 6 shows the Rydex Consumer Products fund having just broken out to a new record high. It's biggest holdings include Altria (MO), Procter & Gamble (PG), Coca Cola (KO), and Pepsi (PEP). The Rydex fund more closely matches the stronger performance in the S&P Consumer Staples Index (STSP) than the Staples SPDR (XLP).

Chart 6

SOME PROMISING STAPLE STOCKS ... Last Wednesday I showed three strong staple stocks including Colgate Palmolive, CVS, and Procter & Gamble. Here are three more that have promising long-term price patterns. I'm showing them in alphabetical order. The monthly bars in Chart 7 show Heinz moving up toward the 40 level. A close through that level would represent a major bullish breakout and put the stock at the highest level in more than six years. Chart 8 shows Kroger having already broken a six-year down trendline. The stock is nearing a new three-year high. Chart 9 shows that Pepsi Bottling has been consolidating between 25 and 30 for the last two years. It wouldn't take much to push it to a new four-year high.

Chart 7

Chart 8

Chart 9

MORGAN STANLEY CONSUMER INDEX NEARS OLD HIGHS... Today's final chart is similar to the S&P Consumer Staples Index shown in Chart 1. Chart 10 is a monthly bar chart of the Morgan Stanley Consumer Index (CMR). The CMR is designed to measure the performance of consumer-oriented, stable growth industries with major exposure to beverage, food, tobacco, and personal product stocks. It looks to me like it's ready to challenge its late 2000 peak near 617. It's a group that's been out of favor for more than three years and is showing early signs of coming back into favor. That would be especially true if rising bond yields are turning investors into a more defensive mood.

Chart 10