Every Wednesday, Marc Chaikin applies his groundbreaking analysis to an ETF or a sector. Today, he looks at SPDR S&P Consumer Staples ETF (XLP).
The Consumer Staples Sector has been underperforming the overall stock market since mid-June and broke its Chaikin long-term trend line in mid-July. It broke down sharply in last week’s sell-off, following the Industrial Sector (XLI) to new 3 month lows, and lagged the market in the bounce off Friday’s lows. As we pointed out last week, the strength in the U.S. Dollar has put pressure on stocks which derive a majority of their revenue from markets outside the United States. The Consumer Staples Sector, along with the industrials, is most vulnerable in this scenario with so many multi-national companies like Colgate (CL), Proctor & Gamble (PG) and Kraft Food Group (KRFT).
The strength in the Dollar vs. the Euro has had a negative impact on companies like Coca-Cola (KO), Colgate Palmolive, Kraft Food, Phillip Morris (PM) and Proctor & Gamble, all of which have broken down technically.
The flip side of the strength in the U.S. Dollar is that Consumer Staples companies that derive the majority of their revenue from domestic activity such as Agriculture Companies, Supermarket Retailers and Domestic Beverage Companies have recently made new highs. Reflecting the overall strength in the U.S. economy and reporting record earnings in cases such as Archer Daniels Midland (ADM), Dr. Pepper Snapple (DPS), Kroger (KR) and Pepsico (PEP), these stocks are the attractive investment opportunities in the Consumer Staples sector.
Rather than treat this underperforming sector as a short side trading vehicle, my recommendation is to use a tool like our Portfolio Health Check to zero in on the strongest and weakest stocks in the XLI and trade on the right side of the market with those bullish stocks.
The Chaikin Power Bar below indicates that 5 stocks in the XLP have a bullish Power Gauge rating while 18 have a bearish rating.
Investors who want some participation in this defensive sector should avoid the XLP ETF and buy the strongest stocks in the XLP, based on their Chaikin Power Gauge rating
, preferably on short-term pullbacks. These stocks are likely to outperform the market and the XLP ETF itself.
The Portfolio Health Check is an excellent tool to help zero in on the strongest stocks in any ETF and with the SPDR S&P Consumer Staples ETF a mixed bag of strong and weak industry groups, it is the most effective way to find profitable stocks in the XLP.
By looking at the individual component stocks through the lens of the 20 factor Chaikin Power Gauge rating, you can easily find the stocks in this outperforming ETF with the strongest potential over the next 3-6 months. These are the stocks to consider buying as this weak sector has recently broken its pattern of higher highs and higher lows dating back to February. Of course if you follow the disciple of only buying strong stocks in strong sectors, the Consumer Staples ETF may be one to avoid altogether, but if you want exposure to this sector, look for the stocks with the strongest potential based on the Power Gauge rating
The Chaikin Power Grid in Portfolio Health Check (see below) maps stocks and industry groups from strong to weak so you can easily determine the best and worst stocks in any ETF. To find the strongest stocks in the XLP, we look to the right quadrant of the Power Grid (strong Power Gauge stocks) where we find stocks with the best potential for price gains over the next 3-6 months. Our favorites in this ETF include Archer Daniels Midland, Kroger and Pepsico. These stocks are all pulling back in a soft market and may provide long entries on weakness over the next few days.
The Consumer Staples sector is a defensive group of stocks which is often used as a safe haven by institutional investors in an uncertain market climate. This was the case yesterday when the XLP was down only 0.44% with the S&P 500 Index down almost 1%. Don’t be lulled into complacency, however, as this is clearly an underperforming sector ETF and the XLP is likely to revert back to form once the market levels out.
Over time, strong stocks in strong industry groups will outperform weak stocks in weak groups.
One stock to avoid in the weak Soaps – Cosmetics Group is group is Clorox (CLX) which recently triggered a Momentum Breakdown Sell Signal in Chaikin Analytics at 86.39.
A better alternative for participation in this underperforming sector is Archer Daniels Midland which reported better than expected earnings yesterday and was up 1.61 in a sharp down day for the market. Our Power Grid would have identified ADM as an attractive stock before they reported earnings and spiked higher.
Chaikin Portfolio Health Check
Chaikin Power Gauge rating
NASDAQ Chaikin Power Indexes