The Stock: Consumer Staples Select Sector SPDR ETF
Recent price: $26.89 (U.S.)
Trend: A big driver of global stock markets has been a percolating U.S. dollar carry trade, where cheap money intended to prime a struggling economy and stabilize a fragile financial system encourages capital flows toward non-dollar assets. Investors are naturally searching for higher returns and protection from a falling greenback. Although this currency and asset imbalance caused by exceedingly low U.S. short-term interest rates has been good for global equities in the short term, a correction may be due. The only question is when that day of reckoning will arrive. Canadian investors have been enjoying a commodity bull ride in this environment, but should make sure their equity portfolios include exposure to bullish defensive stocks that would help weather both a setback to economic recovery and reversal of fortune for the ailing greenback.
Along with the rest of the market, consumer staple stocks are rewarding shareholders over the past two quarters - the S&P Consumer Non-cyclical Index has been Stock Trends Bullish since mid-summer, rallying 39 per cent since the March low and making new 52-week highs in five of the last seven weeks. Many of the multinational companies in the group control powerful global consumer brands and are benefitting from the low U.S. dollar, but the strength of the sector is the growth and stability of earnings. Investors should be riding this comfortable bullish trend and hedge against a market correction. A year ago, when the market was at its 2008 low, the sector was down only 20 per cent compared to the 38 per cent slide of the S&P 500 - not the future investors want to anticipate, but a reminder that they call consumer staples a defensive sector for good reason.
The Trade: Stock pickers may be comfortable taking positions in individual names like Proctor & Gamble Co. , Coca-Cola Co. and Altria Group Inc. , but most investors would do well simply to trade a sector exchange traded fund.
The Consumer Staples Select Sector SPDR, a basket of consumer non-cyclical stocks representing about 12 per cent of the entire S&P 500 market capitalization, is the most actively traded ETF exposed to the sector. The fund's Stock Trends Bullish Crossover (its 13-week moving average trend line crossing above the 40-week moving average trend line) signalled an entry point in July, but expanding relative price performance and share prices making higher highs and higher lows in recent weeks are pressing XLP to regain its pre-recession valuation.
The Upside: The stock market's incredible ride this year will end eventually. The economic recovery remains uncertain, but the bullish trend of this fund suggests that there is room to advance further. Modest expectations of XLP moving above $28 should be balanced with the real motive for this trade: downside relative performance. During last year's market downturn this defensive fund outperformed the broad market according to the playbook. In the event of an impending correction investors can anticipate the same protection. An additional upside for Canadian investors is the potential positive currency exposure should the U.S. dollar rally out of its bear trend.
The Downside: For now investors can let the trend guide their trade, although a sliding greenback handicaps all foreign U.S. equity holdings. Support at the 13-week moving average trend line and the low of early November (US $25.75) should hold. A drop below could signal an exit, although a broad market setback would make this defensive position a preferred spot to remain invested.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca