Back in July, I wrote about the Consumer Staples sector rotating from the “Weakening” to the “Lagging” section of the RRG chart. I used this as an opportunity to find potential short candidates, looking for actionable breakdowns.
This week I wanted to update the RRG to gauge sector rotations, and review some of the charts from July to see what has happened since.
This was the RRG chart that I used on July 11th. Note that the Consumer Staples ETF (XLP) is circled in orange.
Now here is an updated RRG chart, showing the action since mid-July.
Notice that both Consumer Staples and Consumer Discretionary proceeded deeper into the “Lagging” quadrant, reflecting further underperformance. Staples have now turned higher, aiming toward the “Improving” quadrant.
It is also worth noting that Health Care (XLV) has rolled down into the “Weakening” quadrant, while Technology (XLK) and Utilities (XLU) reversed back up into the “Leading” quadrant.
There were three buckets of charts that I discussed back in July: stocks breaking down through key support levels, stocks that had pulled back to a significant support level, and charts that looked pretty constructive overall. Let’s review all three buckets.
Bucket #1: Breaking down through key levels
So out of four stocks, two continued lower and two actually reversed higher. It’s interesting to note that the two stocks that had recently broken down through their 150-week moving averages (K, CPB) had a brief rally, then indeed continued lower.
Bucket #2: Pulling back to key support levels
Here I highlighted two charts that had pulled back to significant support levels but had not yet broken down. One of them (CLX) found support and reversed to the upside, while the other (KMB) broke down to new lows. The lesson? Wait for confirmation when a stock approaches a key support level.
I also noted two stocks that had pulled back to their 50-day moving averages, and were therefore on the “wait and see” list. Both stocks (EL, KO) resolved higher with Estee Lauder outperforming the S&P 500 by 14% over the last ten weeks.
The lesson? Respect the 50-day moving average.
Bucket #3: Charts that actually look constructive
Overall, all three charts still look OK on the long-term weekly read. The daily chart, perhaps a little less rosy. Stocks like Constellation Brands (STZ) continue to move higher, while something like Church & Dwight (CHD) has now pulled back to a key support level (both previous support and 200-day moving average).
I’ll be watching how charts like CHD perform around key support, which will tell you whether a sector like Consumer Staples has the potential to outperform in the coming months.
David Keller, CMT