Consumer Staples Sector Fails To Offer Safe Haven

09/23/05 02:01:16 PM

by Arthur Hill

The Consumer Staples SPDR has been underperforming the Standard & Poor's 500, and continued distribution bodes ill for this sector.

Security: XLP
Position: Sell

In Figure 1, the top chart shows the price relative, which is a plot of the Consumer Staples SPDR (XLP) divided by the Standard & Poor's 500. The price relative rises when XLP outperforms SPX and falls when XLP underperforms SPX. The price relative peaked in April and declined to a new low in September. This tells me that the Consumer Staples SPDR (XLP) is underperforming the S&P 500, and this is clearly negative. Wall Street likes strong sectors and strong stocks, not weak sectors and weak stocks.

FIGURE 1: CONSUMER STAPLES AND PRICE RELATIVE. The top chart shows the price relative, which is a plot of the consumer staples SPDR divided by the S&P 500.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

In addition to underperforming, a key volume indicator shows distribution under way. On-balance volume (OBV) is a cumulative measure of volume. Volume is added on advancing weeks and subtracted on declining weeks. OBV peaked in early February and recorded a new low in August. There was a bounce over the last few weeks, but the overall trend is clearly down as selling pressure overwhelms buying pressure. The theory is that price follows volume, and this indicator points to lower prices in XLP.

With a sharp decline over the last two weeks, XLP is confirming what the price relative and on-balance volume are telling us. The stock formed a large triangle over the last seven months and is testing the lower trendline. In addition, the stock recorded a new low for 2005 this past week. There is still a lot of support around 22.5 from the April and July low, but the bulk of the evidence favors a triangle break and a move lower.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Consumer Staples Sector Fails To Offer Safe Haven

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