The U.S. stock market obviously has a lot of momentum behind it, and the continued leadership of small caps is among the encouraging signs for investors.
However, some technical analysts have been pointing out the recent strength of consumer staples stocks as evidence that a defensive sector rotation is underway.
Of course, this isn’t a signal that a sell-off is imminent. Short-sellers trying to time a market top have been consistently wrong, and the last 10% correction for the S&P 500 was in the summer of 2011.
However, the recent outperformance of the consumer staples sector is something investors might want to keep tabs on.
The Select Sector SPDR Consumer Staples ETF (XLP) is starting to move ahead of the S&P 500 after lagging for several months, notes Investors Intelligence technical analyst Tarquin Coe.
The chart below shows the relative performance of the consumer staples ETF versus the S&P 500. When the chart rises, it means consumer staples stocks are outperforming.
“The ratio looks to be defeating a four month downtrend and suggests the general market is vulnerable to some corrective action over the short-term,” Coe said this week.
Watching the relationship between the consumer staples sector and the S&P 500 is one way to get an idea of traders’ risk appetite, says Chartered Market Technician and blogger Andrew Thrasher.
“When we begin to see a shift favoring the defensive sector in momentum, we can start getting cautious that price may be hinting at a potential downturn,” he wrote. “I do not write this as an attempt to a call a market top. There are still too many bullish charts to make the assumption we’ve seen the highest prices for 2014 put in already. Although, I think the relationship between consumer staples and the S&P 500 is important and is something I’ll be keeping my eye on over the next few months.”
Photo Credit: Johnny Vulkan
DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.
