So far in 2019, the bulls have been in complete control over the stock market. This strength comes despite there not yet being a resolution to the global tariff war and while we await the conclusion of Brexit. However, when things go south for stocks the breakdown comes fast and portfolios suffer severe consequences if investors didn’t balance them properly — that brings us to consumer staples stocks.
Some sectors are better at withstanding selling pressure than others. During a selloff, momentum stocks like Amazon (NASDAQ:AMZN) and Chipotle (NYSE:CMG) likely fall much faster than older, dividend-paying stocks. When times are tough, consumer stocks hold their value much better than most others.
So why isn’t everyone only in consumer staples stocks? Because what makes them almost bullet proof on the way down also slows them down during rallies. Traders are now on an upswing, so consumer stocks are generally lagging.
But therein lies the opportunity.
This year, the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is up only half as much as the S&P 500. So if the bulls remain in control for the next two weeks, consumer staple stocks will have the opportunity of a catch-up rally.
Furthermore, they’re worth snatching up because there are tremendous risks that still loom over the global business sentiment. Yes, stocks are rising now but most of the risks that caused the selling last year are still here. Only the threat from a combative U.S. Fed has abated. So if the sellers come back online, then the consumer staple investments will hold up better than the general markets, so they are a safer bet.
Mondelez made news last year as it invested $4 billion into Canopy Growth (NASDAQ:CGC), which quickly became a go-to cannabis stock to own (it had the best balance sheet of them all). So clearly, MDLZ is a company that is not afraid to take risks. And if the hype of the potential revenues from pot-related products and services is actually true, then MDLZ will get a handsome return on its investment.
Meanwhile, MDLZ stock has its own reasons for ownership. It is now trading above the zone around $45.50, which has been resistance for years. So now it has solid footing below to attack the all-time highs. About a month ago it almost broke out of them, so it could be reloading to set new highs soon. If the geopolitical headlines comply, MDLZ stock should blaze a new trail soon. As long as it’s above $45 per share, this is a real possibility.
MDLZ sells at a price-to-earnings ratio of 25, which is in-line with the sector. So even though its management acts like it’s a momentum company, the stock is not as frothy as one.
Johnson & Johnson (JNJ)
Johnson & Johnson has been a proven performer for over a century, so the effects of last year’s headline over the talcum lawsuits will inevitably fade. This is not to minimize the issue and its effects on those who suffered, but JNJ stock will recover from it. Owning JNJ stock now offers the opportunity to ride the snapback rally.
JNJ is not screaming cheap, but the macroeconomic correction from last year and JNJ-specific headlines have shaken the weak hands from the stock. This makes for a strong base going forward. And the sellers will be less likely to panic at the first sign of weakness.
Consumer Staples Select Sector SPDR ETF
Even though buying the XLP is similar to investing individually in MDLZ or JNJ, doing so diffuses the risks of individual headlines. There are heavyweight tickers in the XLP, but none that would bring down the whole exchange-traded fund. They do, however, trade in unison, so that risk remains.
But from here, the XLP chart looks bullish. Even though it is lagging the SPY in its bounce off the December lows, the XLP is setting higher lows and has a breakout neckline just above current levels. If the bulls can breakout of $55 per share they can overshoot to target the all-time highs from November. There will be resistance along the way, especially around $56 per share … this is where the real selling began last year.
So why expect a move now?
The XLP chart has set higher lows and lower highs, thereby bringing it to a point. These usually are precursors to big moves because the energy needs to disperse quickly. So if the stock market, in general, continues this breakout, the XLP will eventually finish its own breakout upwards.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.