Right now may be the best time to buy consumer staples stocks — the "essentials" stocks that tend to do well in volatile times — since November 2021.
That's a double-edged sword of news…
The edge facing away from you says consumer staples names could catch a big bid. Owners of those stocks would be happy.
Meanwhile the edge facing toward you says almost everything but staples is about to drop. Owners of the S&P 500 — and that's pretty much all of us — have reason to fear.
I'll show you why I think this in just a moment. And I'll share a couple tickers you can consider adding to your portfolio as a defensive measure against more volatility.
But above all, today's TradeSmith Daily will reveal an easy analysis technique you should keep in your toolkit.
One that can quickly reveal shifts in trends… baton-passes between sectors and world markets… and a whole lot more.
It all comes down to the "/" key on your keyboard…
According to Goldman Sachs, 300 million people are about to find themselves on the wrong side of a great flood of destruction. And you might be one of them. How can you best prepare for what's coming?
The technique I'm talking about is finding relative performance between tickers.
To do this, all you have to do is divide one ticker's price by another. Applied to a stock chart, the result shows how the first ticker is performing against the second one.
You can do this in most charting platforms. Let me demonstrate in my personal favorite, TradingView…
Take a look at this weekly chart of the Consumer Staples Select Sector ETF (XLP) relative to (aka divided by) the S&P 500, going back to 2000.
This chart shows us when consumer staples are outperforming the S&P 500, and vice versa.
When the chart goes up, staples are beating the broad market. When it goes down, the broad market is outperforming staples.
Why is this important?
Because consumer staples' outperformance correlates heavily with times of market volatility.
Note the vertical white dotted lines and the labels at the bottom of the chart. Every time staples stocks have surged relative to the broad market over the past 20 years, it's coincided with times of major market volatility:
The dot-com bubble bursting in March 2000.
The Great Financial Crisis beginning in October 2007.
(Briefly) during the Covid Crash in March 2020.
And most relevant to today, just before the beginning of the 2022 bear market.
So, consumer staples' outperformance has a strong track record of occurring right before long-term drawdowns.
You might be saying, "So what? Staples are at their lowest point relative to the S&P 500 since 2000."
To that, I'd say, "Exactly."
A Scary Regime Change in the Making?
Compared to the S&P 500, staples are at their lowest level since the washout that preceded the dot-com crash.
That alone is worth noting. But when we dive into the technicals of the ratio chart, we see another potential regime change in the works.
Take a look at the chart below. It's the same chart, zoomed in to the daily time frame, with the Relative Strength Index (RSI — shown in the middle) and Moving Average Convergence Divergence (MACD — at bottom) added on.
If you've been following along in TradeSmith Daily since I started writing it a few months ago, you know that I put a lot of stock in momentum divergences. In my time trading the markets, I've found few other technical signals more consistent.
This is when momentum indicators, like the RSI and MACD above, disagree with price action. And right now, that's exactly what we're seeing.
Both the RSI and MACD have been rallying while the relative performance of staples to the S&P 500 is falling. This has been happening since July of last year, suggesting a gradual but undeniable weakening in bearish bets on staples stocks even as the price falls.
We saw a similar, though much more short-term, divergence right before the 2022 bear market kicked off and consumer staples stocks began a yearlong outperformance of the S&P.
I don't know if we're about to see another year of broad-based selling in the S&P 500. But I do know that quality consumer staples stocks are some of the best sleep-well-at-night investments you can possibly make.
Staples stocks perform dependably through thick and thin economies, with the best ones throwing off dividends that investors can use as income or to build up bigger positions over time.
Understand, I'm not saying you should sell everything that's not a staples stock in your portfolio.
But in what's proving to be a volatile year so far, it wouldn't hurt to allocate your chips more toward stable, sound businesses in a defensive sector.
And in the consumer staples sector, that's hardly difficult to find…
Procter & Gamble (PG) is the king of staples stocks. Its consumer products have stocked the shelves of department stores — and the medicine cabinets of American homes — for generations. Good economy or bad, you don't need me to tell you people will still buy deodorant, shampoo, and laundry detergent.
The stock currently trades at 24 times earnings and pays out a 2.5% dividend, the latter of which it's done for decades. It doesn't get much more defensive than that.
I'll also call out Walmart (WMT) here. Walmart has the unique quality of being a seller of consumer staples, and something of a staple itself. In times of high prices and price sensitivity — as we're seeing with the American consumer — Walmart is where folks turn to get what they need.
As a sweetener, WMT has some tech ambitions up its sleeve. It's building out an electric vehicle (EV) charging network for its thousands of U.S. stores, expected to be complete in 2030. That's as much of a way to attract investment capital as it is another revenue stream to power its current 1.4% dividend yield and keep growing into its valuation — just below 27 times earnings.
[Disclosure: I own shares of both of these stocks.]
Market volatility always presents an opportunity to buy stocks at better prices.
But from what I'm seeing in the charts, you should consider focusing on the staples sector.
If we're in for a longer period of volatility than most seem to expect, higher inflation than economists expect, and a longer wait until the first rate cut from the Federal Reserve, it'll pay to be invested in stalwart businesses like these.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
P.S. Something unusual just crossed my desk that I felt you should see…
I recently started delving into the work of Eric Fry, an analyst in our network who's had a long history of making major profit calls.
My sources tell me he's made 41 separate recommendations that have gone up 1,000% or more in his career — seriously impressive stuff.
It should be no surprise Eric's an expert in the tech space. It's the only kind of place you can expect returns like that.
Apparently, the U.S. government has already decided the winners of an imminent conflict between major A.I. players, beginning just two weeks from now on Feb. 1.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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