It was an ugly day for the stock market on Tuesday as the broader U.S. indices fell sharply across the board. While few stocks were spared from the selling pressure, the defensive Consumer Staples Select Sector SPDR (NYSEARCA:XLP) fared better than the rest. The S&P 500, for example, tumbled more than 3% but the XLP ETF “only” dropped approximately 1.7%.
Considering the multiyear underperformance of the consumer staples stocks versus the broader market, this group now look likely to shine, at the very least in relative terms.
As I often discuss in this here column, stocks as an asset class are a highly correlated bunch. In other words, if the broader stock indices rally or fall 1% on any given day, most stocks that day will likely also either rally or fall that day. In contrast to commodities or currencies, this intra-asset-class positive correlation in stocks is much higher.
This positive correlation in stocks is why in times of broader stock market downturns or economic downturns, it can be challenging to try to hide or find higher ground within the stock market. However, money will always try and find the best risk-to-reward opportunities, and consumer staples via the XLP ETF to me look like a good bet now and in 2019.
XLP ETF Charts
Click to Enlarge
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To illustrate a relative picture of consumer staples versus the broader market, I plotted the following multiyear chart. This shows that consumer staples stock have been lagging the S&P 500 in recent years, but since October (since volatility has returned and stocks dropped), they have meaningfully outperformed.
Notice how this recent outperformance has allowed the XLP ETF to break above the blue diagonal line of resistance. This is a constructive sign through the lens of technical analysis.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that unlike most other sectors of the S&P 500, the consumer staples still have positive sloping intermediate-term moving averages. In fact, the 50- and 100-day moving averages (yellow and blue lines) just turned positive in recent months.
Also note that while the XLP ETF recently reached the upper end of its up-trending range (blue parallels) and thus may be near-term overbought, it has not broken any near-term trends or moving averages in any meaningful way.
In short, buying the XLP ETF anywhere in the mid $50s to me looks like a good trade here and into 2019, with plenty of upside into the $60s.
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