CONSUMER STAPLES AND RETAIL ETFS HIT RECORD HIGHS -- RETAILERS ARE BENEFTING FROM FALLING OIL -- DIVIDEND PAYING STAPLES MAY BE BENEFITING FROM LOWER BONDS YIELDS -- A STRONGER DOLLAR IS ALSO KEEPING INFLATION AND GLOBAL BOND YIELDS DOWN
WHY ARE STAPLES AND RETAILERS LEADING ... We generally look at the relative performance of market sectors to get clues about stock market direction. It's normally a good sign, for example, when retailers are doing better than the general market. It's normally a bad sign when consumer staples are doing better. At the moment, however, both groups are showing market leadership. What kind of message do we get from that? Is there some explanation why both are doing better at the same time. Maybe. Chart 1 shows the Consumer Staples Sector SPDR (XLP) hitting a new record high today. Its relative strength ratio (dashed line) is rising as well. It's one of the day's strongest sectors. Chart 2 shows the Market Vectors Retail ETF (RTH) also hitting a record high today. It's relative strength ratio (dashed line) is surging as well. Since August 1, the RTH has gained 15% while the XLP has risen 13%. Both have outperformed the S&P 500 gain of 6%. The only two sectors to do better during that period were healthcare and utilities.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
FALLING CRUDE HAS BOOSTED RETAILERS... Last Thursday's message showed that the plunge in the price of oil since July has been a big driver in better retail performance. Chart 3 shows that the upturn in the RTH/SPX relative strength ratio coincided closely with the plunge in the price of crude oil. Interestingly, the relative strength line of consumer staples turned up at the same time. That suggests that the plunge in crude has also boosted consumer staples. Part of the reason why plunging oil is helping consumer staples is because it has lowered inflation expectations which, in turn, has kept a lid on Treasury yields.
(click to view a live version of this chart)
Chart 3
RISING BOND PRICES INCREASE APPEAL OF STAPLES... Consumer staples generally do better when bond yields are falling, and bond prices rising. That's because lower bond yields have been associated with economic weakness which generally benefits defensive stock groups. Another reason why lower bond yields benefit those groups is because they are traditional dividend-payers which compete with Treasury bonds for yield. Low bond yields push money into staples and utilities. Chart 4 shows rising bond prices since the start of the year helping to boost the relative performance of staples. [Plunging crude oil prices have also been supportive to bond prices]. There's also an international dimension to consider. While the U.S. economy is showing improvement, that's not the case in Europe and Japan. The fact that bond yields in the U.S. are higher than in both regions has also helped drive money into Treasuries. That has kept bond yields down. Another factor keeping bond yields down has been a stronger dollar. The orange line in Chart 4 shows the U.S. dollar surging against the Japanese yen since July. That was right about the time that staples and retailers started to do better. My premise here is that the rising dollar and falling crude oil are boosting retailers. That disinflationary combination is also keeping Treasury yields down which is boosting dividend-paying stocks like staples. That may help explain why both are doing better at the same time. Retailers may be reflecting the stronger U.S. economy, while staples may be reflecting weaker foreign markets.
(click to view a live version of this chart)
Chart 4
TARGET, LOWES, AND WALMART HIT RECORDS... Three of the day's strongest stocks are in the retail group. Staples (SPLS) gained 9% to reach a new ten-month high. Target (TGT) surged 7% to a new record high on strong volume (Chart 5). Lowes (LOW) climbed 6% to reach a new record as well. Wal-Mart (WMT) had another strong day. Chart 6 shows the world's largest retailer climbing 1.4% to reach another record high. WMT has been surging since it broke out to the upside last week. Wal-Mart is one of the biggest holdings in the retail and staples ETFs discussed above. There's an overlap in other holdings as well. Costco is in both ETFs (as are CVS and Walgreen). Both ETFs also include a number of food & beverage retailers. That may be another reason why both ETFs are doing so well together. Coca Cola was today's biggest gainer in the staples space.
(click to view a live version of this chart)
Chart 5
