Consumer Staples Wave a Red Flag - SYY, WMT, TSN, HRL Up

Posted by

May 18, 2010

Tuesday was brutal for stocks, again, with the S&P 500 closing 1.4% lower to end the session at 1120.80. It was the tenth losing day of the last sixteen, and of those ten losing days, each has been made on higher volume than the previous day; none of the winners were technical ‘accumulation’.

While that clue alone further solidifies the likelihood of more selling, the few stocks that investors did choose to buy (as opposed to sell) today are blatantly defensive in nature… the kinds of stocks that should - hopefully - survive a marketwide pullback. A few examples include Wal-Mart (NYSE:WMT), Sysco (NYSE:SYY), Hormel Foods (NYSE:HRL), and Tyson Foods (NYSE:TSN); they were among the few names today to make forward progress.

The common element among them? They all deal in consumer staples… food, mostly.

And, it’s not likely to be a coincidence that these were the only stocks with any progress to speak of today. Stocks can frequently indicate the current investor mood, and when presumably-recession-proof arenas start to hold up while everything else is crashing down, it’s often a clue that investors are expecting the equity market to deteriorate so much that a portfolio shuffle is merited.

The idea isn’t a necessarily a bad one; no matter how shaky things get on the economic or market front, consumers won’t stop eating. They may change what they eat, but they have to eat.

In fact, the shift in ‘what they eat’ may end up being boosts for the likes of Hormel Foods and Tyson Foods. Each specializes in pre-packaged, low-priced food that is an attractive alternative (financially speaking) to restaurants, and even pricier groceries.

That ’save don’t spend’ mentality helps Wal-Mart too, pulling shoppers out of higher-end retailers like Abercrombie and Best Buy, and pulling them in the discounter’s doors where comparable items can be had at better prices.

While the defensive mindset indicated by the stocks that actually rise in a bearish environment makes sense, investors should also know it’s generally a short-term mentality…. the strength in the consumer staples stocks and weakness in all other sectors typically doesn’t last long enough to even put the theory to the test with quarterly results.

On the other hand, it does last long enough to damage the portfolios of investors who don’t respond to it.

Consumer Staples Rising While Broad Market Falls

The S&P 1500 is down 1.3% for the last two days, while the S&P 1500 Hypermarket & SuperCenter Index - which Wal-Mart is a constituent of - is up 2.4%; the S&P 1500 Food Distributor Index is up 1.1% for the week so far. Personal products and food retailers are also noteworthy winners for the week so far. The disparity isn’t’ wide yet, but a few more days of the same bullish/bearish pressures could mean the difference between a profitable and unprofitable summer.

Simply put, sector rotation is hinting that investors are thinking defensively. Whether they should or not, they may follow-through and next create a self-fulfilling prophecy by further buying staples stocks at the expense of other groups.

Share and Enjoy: