Staples not so stable

 

Consumer staples are in a bit of a tizzy. If we examine the SPDR Consumer Staple ETF (XLP), we can see that the sector has suffered about a 10.5% drop since its peak in February. Unlike the broader markets, it has not recovered similarly to the S&P 500 since the February market correction. XLP broke its trendline in late February, although it remains above its last low of about $52 on the weekly chart. The 200 day SMA (40 week SMA) was broken at the same time the trendline was cracked in late Feb. I place no faith in MA crossovers as indicators, but for what it’s worth, it looks like the dreaded “death cross” of the 50 day (10 week) SMA moving below the 200 day (40 week) SMA is likely.

 

I bought this ETF for our ValueTrend Equity Platform as it tested its trendline late last year. The chart looked to be offering a decent entry point at the time, so I took the bait. The question now is – do I hold, or do I fold? I thought I’d write out my thoughts for you, the good readership, on this trade. It might to allow you to see how I like to approach a difficult trading decision.

 

  • Seasonally, the sector can be a bit soft at this time of the year, having its best performance in the summer. A rotation that Brook Thackray likes to talk about in his Investors Guides is to rotate e very spring and fall between XLP (staples) and XLY (discretionary). He shows us that buying XLP in the spring, and selling in the fall to rotate into XLY outperforms holding them together. So, an argument from a seasonal perspective would be to stay in the trade, being so close to the seasonal entry point now.
  • Technically, the ETF has not yet cracked its last low of $52-ish. I have a trading rule outlined in my book Sideways.If a stock/ETF that was in a trend cracks that trend, I sell. A broken trend is determined if the last low is taken out by a minimum of 3 days (max 3 weeks) AND the 200 day SMA is taken out. So far, it’s just been the 200 day (40 week) SMA that has been broken. But the $52 point is dangerously close!
  • Support is at $51-$52—see the horizontal green line on the chart. Do I sell just as we are getting into that price range?
  • The individual components of the ETF have fallen, although they are consolidating. The major stocks of the ETF weigh in at 9% plus each. They are KO, PM, PG (the largest holding at over 11%), and PEP. Next in weighting is WMT (7%), followed by a bunch of 4% weights in COST, MO, CVS, MDLZ and CL. I’ve posted a few of the heavily weighted charts below with very brief comments:

 

Bear with my references to the many old marketing lines used in this analysis. Couldn’t help myself.

 

Proctor & Gamble (PG)

Yikes! Not good—big break of trend. They may have advertised that their products are “touching lives & improving life”, but their stock is not improving their investors lives lately.

 

Coca Cola (KO)

 

Coke used to advertise that their soft drink was the “Pause that refreshes”. This pause may indeed be one that refreshes the stock. Despite breaking the 200 day SMA, it is on trend from the big picture perspective. The stock is consolidating well above its last significant low of $39-ish.

 

Altria (MO)

 

Altria’s stock is killing its holders slowly, similar to its product line. A sideways trading range has contained the stock since 2016 providing no growth to shareholders. The good news is that MO is near the same support levels it has successfully bounced off of in the past.  Somewhere in the $60 area has historically been a good buy point on the stock for a 2-3 month trade. The companies slogan of “We’re a company moving forward” is not applicable to its shareholders, it would appear. Neither was their original slogan surrounding their benchmark product “You get a lot to like with a Marlboro”. Similar to my feelings about cigarettes, I don’t like the stock much. Except for its neartermed potential to bounce.

 

Pepsi (PEP)

The Pepsi taste challenge shows some discernable difference between it and Coke – insofar as stock price patterns go. Things do go better with Coke, this time. KO has a greater safety margin over its last low of $39 on the chart. PEP, which is flirting with its last trendline low of around $108, may be in greater danger of cracking the trend if $108 is taken out. If that happens, I will feel sorry for the Pepsi Generation. PEP’s current slogan goes…”Live for now”. I’d rather wait to see if the stock can hold its trendline before deciding to do anything in the “now”.

 

Conclusion

The individual components of the XLP ETF are largely consolidating within their trendlines (except PG, which looks terrible). Most have not taken out lower lows. The ETF itself has not taken out its low. The seasonal buy period is 2 months away for the sector. My decision is to hold the ETF for now, and sell only if the current support level of $52 is taken out and remains below $52 for 3 weeks.

2 Comments

  • Good morning Keith. Thanks for this as I am in the same situation. Appreciate someone else’s opinion. My thoughts were along the line of your first point, seasonality can show an effect in a few weeks and given the components, not popular right now (with higher beta more the rule) but not a group of companies to be tossed aside forever.

    Reply
    • If you own individual names, be sure they are sticking to the trendline or sticking to support if in a trading range. Stocks like Kraft and PG are not great looking charts and I dont want to own them–whereas the cola’s etc are on trend. BTW–I am trading MDLZ–we sold it at $48 a while ago, entry is around $41. Cycle is about 1 year–we have done it once, looking to re-enter soon if as when it gets to $40-41
      So there are opportunities out there in the sector. You just have to be aware of what makes sense as a potential trade vs. what looks totally broken.

      Reply

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