CONSUMER STAPLES CONTINUE TO SHOW GOOD RELATIVE STRENGTH -- STAPLE LEADERS INCLUDE COKE, CVS, AND MERCK -- ANOTHER DEFENSIVE SIGN IS UTILITIES DOING BETTER THAN TRANSPORTS -- MICROSOFT HITS SIX-YEAR HIGH -- AIG PLUNGES
CONSUMER STAPLES SHIFT FROM LAGGARDS TO LEADERS ... One market sector that keeps showing up on the 2007 leadership list is consumer staples. The Consumer Staples SPDR (XLP) has outperformed the S&P over the last week, the last month, and since the start of 2007. That's a relatively new development. Chart 1 compares the XLP to the S&P 500 since the start of 2002. [Plotting the S&P 500 as the zero line allows us to see the "relative" performance of the XLP]. The falling blue line shows that consumer staples have been underachievers during the bull market that started five years ago. That's not unsual. Who needs defensive staple stocks in the midst of a bull market? Chart 2, however, shows the same chart since the start of 2006. It shows the XLP (blue line) trading over the S&P 500 (flat line) over those twenty-two months. Chart 2 also shows that the XLP has started doing much better than the S&P since mid-July when the market started to weaken. The blue line (which is in effect a relative strength ratio) is moving close to a 52-week high. That suggests that money is moving pretty consistently into consumer staples. That could be occurring for several reasons. One obvious reason is that investors are turning more defensive. Another is that consumer staples are large-cap multinationals that benefit from a falling dollar. They allow investors to stay in the market, but in a group that shouldn't get hurt much if the economy continues to weaken.
Chart 1
Chart 2
STAPLE LEADERS INCLUDE COKE, CVS, AND MERCK ... It's usually a good idea to look for individual stock leaders in a group that's starting to show new market leadership. Chart 3 shows three such consumer staple leaders since the start of 2007. All three are plotted "relative" to the Consumer Staples SPDR (XLP) which is the flat zero line. And all three have been doing much better than the XLP. In fact, Merck has done 25% better, CVS 24% better and Coca Cola (21% better). And all three have bullish chart patterns.
Chart 3
COKE HITS SEVEN-YEAR HIGH ... Coca Cola is trading above 60 for the first time since 1999. The monthly bars in Chart 4 show the stock initiating a new uptrend a year ago when it first broke through 50. Even at 60, it's still 33% below its all-time high near 80 and relatively cheap. Chart 5 shows the KO:SPX ratio having just broken a resistance line extending back to 1997. That makes Coke a relatively safe bet.
Chart 4
Chart 5
MERCK BREAKS OUT... I showed Merck hitting a new 52-week high earlier in the week, but its longer-range chart is worth a closer look. The monthly bars in Chart 6 show Merck breaking through its mid-2003 peak at 53.64. That bullish move put the stock at a new six-year high. Its relative strength ratio (below chart) has now risen to a new three-year high. Merck still looks cheap on an absolute and relative basis.
Chart 6
CVS HITS NEW RECORD ... The monthly bars in Chart 7 show CVS/Caremark hitting a new record high this week. The stock is trading well above its early 2001 peak near 31 and shows no signs of slowing its bullish ascent. The relative strength ratio (top of Chart)is has just hit a new record as well. That's a bullish combination. Consumer staples are usually one of the first places investors rotate to when the economy shows signs of slowing. And that appears to be just what they're doing. Two other defensive groups that are attracting new funds are healthcare and utilities.
Chart 7
UTILITIES ATTRACT NEW MONEY... Utilities are also starting to show better relative strength. The daily bars in Chart 8 show the Dow Utilities rising more than 1% today after having bounced off moving average lines. It's relative strength ratio (bottom of chart) is starting to rise as well. Utilities are traditionally defensive stocks. They do well when bond prices are rising (as they are now) and the economy is slowing. Some utilities also benefit from rising natural gas prices because of their exposure to that commodity. Transports, by contrast, are trading below their 200-day average and continue to display relative weakness (Chart 9). Transports are economically-sensitive and suffer accordingly in a slowing economy. They also suffer when energy prices are rising. The juxtaposition of those two groups also shows a defensive market strategy at work.
Chart 8
Chart 9
ENERGY GAINS, FINANCIALS SAG... The day's trading reflected the same diverging trends that we've seen for some time. A falling dollar pushed gold up $5 and crude oil more than $3. That kept commodity stocks in a market leadership role. Chart 10 shows the Energy SPDR (XLE) climbing more than 1% after bouncing off its 50-day average. Its relative strength line is still rising. Financials lost more ground today (as did consumer discretionary stocks). Chart 11 shows the Financials SPDR (XLF) trading near its summer lows. Its RS line is trading at a new low. The XLF needs to reclaim its 50-day line to improve its short-term outlook. It seems doubtful that the market can mount a serious rally without some bounce in the financials.
Chart 10
Chart 11
TALE OF TWO DOW STOCKS... The market closed modestly lower today (although the Nasdaq lost 24 points). Chart 12 shows the Dow Industrials (which lost 3 points) is still testing chart support at its 50-day average and its early September peak at 13494. Big board breadth was slightly negative (by a 17 to 15 margin). That's enough, however, to keep short-term breadth measures (like the McClellan Oscillator) in negative territory. The Dow's biggest gainer was Microsoft which rose more than 2%. In so doing, it broke out to a new six-year high on strong volume. The Dow's weakest stock was American Intl Group which fell to a 52-week low on massive volume. Just another example of why it's so important to be in stronger sectors of the market like technology and out of weaker ones like financials.
Chart 12
Chart 13
Chart 14
