Consumer Staples Sector Bucks The Bearish Tide

Consumer Staples Hint at a Breakout Move

Think the recent marketwide pullback dragged every sector down with it? Guess again. While it's true that most sectors tanked in January (and arguably started that tumble in December), one group of stocks has not only resisted the bearish tide, but was quietly positioned for a potential breakout.

That sector? Consumer staples stocks (XLP).

The strength makes philosophical sense. If the market is moving into a bear market as a pressures to a recession, defensive, non-cyclical names like Procter & Gamble (PG) or The Kroger Co. (KR) become preferable holdings, as it's unlikely consumers will stop buying food or soap no matter how roughly the economy treats them. On the other hand, veteran traders know these theoretical tendencies  don't always behave as logically predicted. In other words, if the chart of the consumer staples sector looks bullish, it may or may not be due to cyclical forces. We have to take hints at face value.

With that being said, the chart of the S&P 500 Consumer Staples Index below tells the story pretty clearly.  Not only has the index shrugged off most of the recent weakness, it's once again knocking on the door of a horizontal ceiling... and has already cleared a ceiling established in late 2014 and early 2015. One more good thrust above the technical ceiling at 523 could prove quite catalytic. Both are plotted as dashed lines, overlaid on the chart.

S&P Consumer Staples Index Weekly Chart

Also on the chart you'll see the trailing and projected earnings for the S&P 500 Consumer Staples Index. Looking closely, you'll see that Q4's earnings rolled in higher than the year-ago bottom line for the index... about 3% higher. It's not leaps-and-bounds growth, but it's better than average, and impressive given the nature of the business.

It's also clear analysts are looking for significant earnings growth going forward, which takes some of the froth of the trailing P/E of 21.37. While analysts are historically over-enthusiastic with their outlooks, that doesn't change the fact that you have to pay for quality, and the consumer goods sector is delivering quality right now... even if that quality just comes in the form of reliability.

Whatever the case, a move above the upper ceiling at 523 would clear out the last of the established resistance levels. If that happens, the valuations may become secondary to the technical bullishness that could develop.  (And if for some reason 2016's earnings do take off as expected, that could fan the bullish flames.)

It's certainly something to keep an eye on, if for no other reason than because it's not getting a lot of attention.