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S&P 500 : Defensive Stocks Rising

(Fri, 24 July 2020). Consumer staples are starting to break out of a trading range. But this isn`t a sign of the market getting defensive yet. Consumer staples are playing catch-up with the broader market. Should investors be worried?

Consumer staples have started to break out on a technical basis. The sector has not improved on a relative basis and is just following the market higher. This defensive sector’s move now could be an early sign of a flight-to-safety. The stock market’s powerful rally since March has been great for nearly all sectors. But one sector hasn’t fully recovered. That’s the consumer staples sector.

 

Consumer Staples Finally See a Breakout

The consumer staples space, which contains companies that manufacture prepackaged food, cleaning supplies, alcohol, tobacco, and other necessary items, has been rangebound since April. For a sector that lacks the excitement of a hot story driving retail traders, these companies are downright boring. Shares are now starting to head back up on average. This kind of move, with the rest of the market continuing to head up on average, is a healthy sign.

It indicates a market breadth, meaning the market is a rising tide lifting all boats, rather than having a handful of stocks drag the market average higher.

 

Implications of the Rally

What does this mean? It’s a bit early to tell, but there are a few possible explanations. Traders may be taking some profits from high-flying tech off the table and moving to more stable, dividend-paying companies after the powerful market rally.

It certainly looks more attractive than dumping money into a story stock that’s already exploded higher over the past few months. This move could also be a part of sector rotation. Markets often play a game of “follow the leader” and occasionally change the sector that’s leading the market. After the great run in tech, consumer staples may have their turn in the sun.

Looking at how the consumer staples are doing relative to the S&P 500 Index, it’s clear that there’s been no improvement there. Traders will have to wait further for more evidence of sector rotation. Given overall valuations in other sectors of the market, plus some lingering fear of continued economic weakness, a move into the underperforming consumer goods space looks attractive right now.

During the next market selloff, this is one space likely to rise first, as investors get more defensive. Once that happens, and the staples move higher relative to the rest of the stock market, the easy profits in the space will be had. Until then, this is just a sign that the stock market as a whole is likely to head higher.

 

 


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