Consumer staples stocks are awakening. One month ago, the Consumer Staples ETF (NYSEARCA:XLP) was down 6.6% for 2021. Now, it’s up about 1%. The change may not seem like much by other sectors’ standards, but it’s substantial for a stodgy area of the market like staples. What most impressed me was the sharp breakout over $68 last week that drove XLP to a new record.
Because of the awakening, today’s article will reveal a trio of compelling setups to play the strength. It helps that XLP formed a three-day pullback into the weekend and now has an easy entry point. Most of its components followed suit and are also offering clean buy-the-dip patterns.
Here are my three favorites:
The lot of them also boast above-average dividend payouts, which allows you to hold them longer-term if you’re looking for added cash flow to your portfolio. Let’s take a closer look at each pick.
Consumer Staples Stocks: Coca-Cola (KO)
Both Coca-Cola and Pepsi (NYSE:PEP) offer similar patterns, but with Pepsi’s earnings coming around the corner, KO is the one with more time to trade without the uncertainty of its quarterly report hanging over our heads. In March, Coca-Cola shares scored a sharp upside reversal that pulled prices back above key resistance at $51.50. High volume buttressed the rapid rise, creating greater momentum and believability to the move.
The three-day dip carrying KO into the holiday weekend is the first buying opportunity we’ve seen since the start of the new uptrend. It did close at the low of the day, so I suggest waiting until a reversal candle forms and/or prices rise above a prior candle’s high to confirm the new upswing has begun.
The pivot high of $55, tagged on the last trading day of 2020, is a modest target for the play if you’re swing trading. Given the stock’s cheap price tag and lower implied volatility, I like using bull call diagonals.
The Trade: Buy the June $50 call while selling the May $55 call for a net debit of around $2.85.
Proctor & Gamble (PG)
The high correlation among consumer staples stocks means there’s very little differentiating between our three picks. PG’s price chart echoes that of Coca-Cola’s. What’s perhaps most impressive about the recent reversal is just how clean the stock is behaving around technical signals. When fishing for bottoms, the logical signal to use for confirmation is a break of resistance. In Proctor & Gamble’s case, that ceiling was $130.
Through February and most of March, it halted every advance. Once we finally cleared it two weeks ago, however, buyers came rushing in. We’ve now come full circle, and PG is flying above all its major moving averages once again.
Like KO, a three-day pullback ushered PG into the weekend. Friday’s intraday test of the 200-day moving average held. Now, all we need is a push above Friday’s high to confirm a new swing has begun.
The Trade: Buy the May $135/$140 bull call spread for $1.70.
Johnson & Johnson (JNJ)
Johnson & Johnson is a leader in its sector and has outperformed XLP for most of the year. It did slip below the 50-day moving average in late February, but a swift recovery pushed JNJ back into positive territory for the year. March 26 was the game changer for me. The high volume breakout officially launched the stock back to an uptrend giving us the green light for bullish trades.
With Friday’s drop, we’re now testing the top side of the 50-day. If buyers play defense here and support forms, this will turn into a great entry point for an eventual run to $170.
The Trade: Buy the May $165/$170 for $1.60.
On the date of publication, Tyler Craig held LONG positions in KO.
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