Defensive sectors have gained ground since the Brexit referendum, with investors seeking safety over growth. Utilities, bonds and precious metals have all benefited from this rotation, which may continue through the 3rd quarter. Other high yielders including consumer staples have run in place or lost a little ground during this period but could play catch up in coming weeks.
Modern investors show little patience with consumer staples because they believe returns will be low and slow to accumulate, in line with the sector’s sleepy reputation. However, these stocks can trend quickly in periods of market stress like the one we entered last week. As a result, it makes sense to give these securities a closer look, with an eye toward profitable entry levels.
SPDR Select Sector Consumer Staples ETF (XLP) pays a 2.37% dividend and manages a portfolio of 43 food and household product stocks, with Proctor & Gamble Co. (PG) and Coca-Cola Co. (KO) the two largest holdings. The fund also carries a basket of cyclical exposure that includes Wal-Mart Stores Inc (WMT) and Costco Wholesale Corp. (COST), with both securities more vulnerable to economic fluctuations than the majority of recession-resistant components.
The fund has been engaged in a major uptrend since 2009, grinding out a rising channel that stalled in August 2015 just above 50. A selloff to a 10-month low got bought, yielding a bounce to resistance in October. It tested that level into February of this year and broke out, triggering a rally burst to 53.77. It then eased into a shallow channel that’s rewarded neither shorts nor longs. A rally above 55 will be needed to break this pattern and establish a more dynamic uptrend.
Proctor & Gamble pays a 3.26% dividend. It broke out above the 2007 high at 75.18 in 2013 and entered an uptrend that spent the next 1½ years grinding sideways on top of new support. It broke out in November 2014 and posted an all-time high just one month later at 93.89. It then sold off in a January 2015 breakaway gap, followed by a steep decline that bottomed out in August at a 3-year low.
The subsequent bounce stalled at the .618 Fibonacci retracement level in March, yielding 3 months of support testing at the 200-day EMA. The stock sold off after Brexit but is holding range support near 79 and could post a higher low in coming days. A breakout above 84 will target the unfilled January 2015 gap, which has aligned tightly with the .786 retracement. This predicts back-and-fill type price action that attracts strong-handed buyers above 90.
Coca-Cola pays a 3.19% dividend. It topped out at 44.47 in 1998 after a powerful uptrend and sold off to 18.72 during the 2008 to 2009 bear market. It rallied within a point of the multi-decade high in 2013 and dropped into a sideways pattern that finally reached resistance in October 2014. A breakout attempt failed, yielding a decline that posted a 2-year low in August, followed by a recovery wave that reached resistance for the 2nd time in March.
Price action since that time has ground out a triangle pattern across the breakout level, marked by lower highs and higher lows off the April 2016 low. The stock dropped into the 200-day EMA this week after gapping down on Friday. While European sales should stay resilient in coming months, the decline points to anxiety about the strengthening U.S. dollar and its impact on profits. Even so, it’s impossible to ignore the 18-year cup and handle pattern because a breakout could lift the stock into the 60s or 70s.
The Bottom Line
High yielding consumer staples stocks have underperformed other defensive sectors since the Brexit referendum but it’s still early in the game and market players could soon add these traditionally defensive stocks to their portfolios, triggering a game of catch up with bonds, utilities and precious metals.
Consumer Staples Could Offer Relief From Brexit (KO, PG)
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