DEFENSIVE STOCKS ARE LEADING THE MARKET HIGHER -- CONSUMER STAPLES SPDR TURNS UP AND SHOWS MARKET LEADERSHIP -- SO DO UTILITIES AND REITS -- PHARMA IS LEADING HEALTHCARE SECTOR HIGHER -- ALL OF WHICH SUGGESTS INVESTORS MAY BE TURNING MORE DEFENSIVE
CONSUMER STAPLES TURN UP... Although the stock market continued to climb this week, it's a little surprising to see defensive stocks leading it higher. The four strongest sectors this past week were REITs (+3.3%), healthcare (+2.1%), consumer staples (+1.7%), and utilities (+1.2%). All did better than the S&P 500 weekly gain of +0.7%. At the same time, more economically-sensitive sectors like energy, industrials, financials, and energy ended the week in the red. Lower bond yields since May may be contributing to the move into dividend-paying stocks. But it's also possible that investors are turning a little more defensive. Let's start with a look at consumer staples which had a strong week. Chart 1 shows the Consumer Staples SPDR (XLP) rising above its 200-day moving average for the first time since February, and trading at the highest level in six months. Consumer staples had been the market's weakest sector during the first five months of the year. The lower box, however, shows the XLP/S&P 500 relative strength ratio bottoming at the start of June and outperforming the market since then. This past week the ratio broke its downtrend line extending back to the start of the year. Part of the reason for the upturn in staples may have been the fact that bond yields peaked in late May and have been lower since then (green line). [Lower bond yields have also boosted utilities and REITs]. But there may be something else at work here. It could be the threat from rising tariffs. The U.S. imposed tariffs on aluminum and steel on June 1. Since that date, consumer staples went from the market's weakest sector to the strongest. Consumer staples have been the market's strongest sector since June 1. Other defensive stocks have also been doing better since then.
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Chart 1
UTILITIES AND REITS ARE ALSO DOING BETTER... Here are two other defensive stock groups that have done better since the start of June. Chart 2 shows the Utilities Sector SPDR (XLU) in a new uptrend after clearing its 200-day average during June. It ended the week at the highest level of the year. Of particular interest is the fact that its relative strength ratio (gray area) bottomed at the start of June (with staples). The pullback in bond yields probably accounts for some of that buying. Some of it, however, may also be a move to a more defensive stock group. REITs are doing even better. Chart 3 shows the Real Estate Sector SPDR (XLRE) closing at a new record on Friday. Its relative strength ratio (gray area) started rising earlier in the year, but also rose sharply during June. Since REITs pay high dividends, most of their gains since May are probably due to the peak in bond yields (green line). But they also may be attracting some defensive money. Healthcare stocks have also been doing much better. Especially pharmaceuticals.
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Chart 2
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Chart 3
PHARMACEUTICALS ARE LEADING HEALTHCARE HIGHER ... Healthcare has also been traditionally considered to be a more defensive sector. And it's doing very well. The daily bars in Chart 4 show the Health Care SPDR (XLV) now trading at the highest level since January. And it's become a market leader. That can be seen by its relative strength ratio (gray bars) which have been rising since May. In fact, healthcare has been the market's strongest sector since its May bottom (and has shared that leadership role with consumer staples since the start of June). Also worth noting is a recent rotation within the healthcare sector itself. For the first time this year, pharmaceuticals are leading the XLV higher. Chart 5 shows the Dow Jones US Pharmaceuticals Index also bottoming in May. Its relative strength ratio, however, didn't start rising until June, and has seen even bigger gains since the middle of July (see arrows). Drug stocks were the weakest part of the healthcare sector through most of the first half of the year. They've recently become the strongest. Pharmaceuticals are considered to be one of the most defensive parts of the healthcare sector. I wonder if their sudden popularity during June and July is part of a general shift into more defensive stocks. Along with staples, utilities, and REITS.
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Chart 4
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Chart 5
PLAYING DEFENSE... Other writers on this site have pointed out the recent strength in some of the more defensive parts of the market shown above. I've assumed that's been due primarily to a pullback in bond yields and nothing to be too concerned about. After reviewing their charts, however, and the fact that some of them have become market leaders, it's time to consider the possibility that something else is happening. Investors buy defensive stocks for a couple of reasons. One is that they pay higher dividends. The other is simply that they're starting to turn more defensive on the stock market. I keep hearing financial experts reassure everyone that escalating tariff tensions are nothing to worry about. It's all just a negotiating tactic. Apparently, some investors aren't sure about that and are starting to hedge their bets. That may also explain this week's buying of value stocks that have been out of favor all year. Chart 6 shows the Russell 1000 Value iShares (IWD) exceeding their March peak to close at the highest level in six months. The IWD/SPX ratio (gray bars) had the biggest weekly jump since April (as growth-oriented tech stocks weakened). Buying cheaper value stocks may be another way that investors are looking to protect their market gains. I also keep hearing on cable TV that the rising stock market is shrugging off the tariff threat. If that's true, why are defensive stocks leading it higher?
