Follow the technology stocks! Is the consumer essentials sector losing its momentum?

In the past month, consumer staples stocks have been one of the best performing stocks in the stock market. While the benchmark S&P 500 index has fallen by 0.9% since December 10th, the S&P 500 Consumer Staples Index has risen by 4%.

As we all know, consumer staples are the stores and items that people can't live without in their daily lives, such as grocery stores, food companies, and housewares manufacturers like toilet paper, toothpaste, and garbage bags.

Regardless of the economic situation, people always need to go to these stores to buy these products, so these companies don't need to go through dramatic fluctuations in demand like other sectors of the economy. Additionally, due to their stability, these companies often regularly distribute growing dividends to shareholders.

With these two advantages, consumer staples become a "risk-averse" sector. When other sectors in the market appear risky, investors often move their funds to this sector.

Recently, the stock market has been risky, and the S&P 500 Information Technology Index (one of the most popular "risk investment" sectors) has fallen by 5% in the past month, and many stocks in this sector have suffered even more.

But the upward trend of consumer staples stocks may lose momentum, at least in the short term.

One of our favorite methods for evaluating trader sentiment is to look at the Bullish Percentage Index (BPI). BPI tracks the percentage of stocks in a sector that are in a bullish state, with a range of 0-100.

When the BPI drops to 30 or below (oversold zone), it releases a buy signal, and then the BPI turns upward. When the BPI reaches 80 or above (overbought zone), it gives a sell signal, and then the BPI turns downward.

The graph below shows the BPI (Buy Part Index) of the popular daily consumer goods ETF-SPDR (XLP) and the consumer essentials sector, marked by the black and blue lines on the graph, respectively.

In the past two years, the BPI of consumer essentials has reached overbought levels 4 times, with the first 3 times occurring in 2020. In the months following the overbought levels, XLP always experienced sharp declines or pullbacks.

Now is the 4th time, from December 1st to January 4th, XLP has risen by 11%. On Friday, January 7th, the BPI of consumer essentials reached 91, entering the overbought zone. On January 11th, the BPI recorded its first decline since the end of November, closing below 88.

The drop from 91 to 88 indicates a change in trend and serves as a sell signal for the consumer essentials sector.

These signals may not always manifest immediately, but most of the time, they serve as a good trading reminder.

If you hold consumer essentials stocks for long-term investment, or even if you are trading 'for dividend income,' this is not a reason to panic and exit positions. After releasing sell signals in April and September 2020, XLP only dropped by 6% and 7% from the peak to the low point, respectively. Therefore, if your investment or trading style is long-term, you are likely to weather the volatility calmly.

However, if you are betting on the rise of consumer essentials stocks as a short-term speculation, now may be a good time to take profits.

Alternatively, if you are considering buying or going long in the consumer essentials sector, there may be better entry opportunities in the coming days or weeks.

If you haven't invested in the consumer staples sector yet, we recommend staying on the sidelines. We are looking for bearish trading opportunities in this sector, but haven't found anything worth focusing on.

However, by observing the price trends of consumer staples stocks and other market sectors in the coming weeks, you will gain market experience.

(This article represents the author's personal views and should not be taken as investment advice. Investments carry risks, and entering the market requires caution).

Analysts: Ben Morris, Drew McConnell

Compiled by: Samantha