Weekly ETF SPY: XLP – What Defensive Sector Outperformance Means

The defensive consumer staples sector has been outperforming the economically sensitive consumer discretionary sector. Some say that’s bearish, contrarians may say it’s bullish. Here’s what the facts say:

Defensive sectors like health care, consumer staples and utilities have been on fire. In fact, health care and consumer staples are the two best performing industry sectors of the U.S. stock market.

On paper, the strong showing of defensive sectors parallel to all-time stock market highs is odd. But let’s face it; the overall market action (meaning the QE bull market) is odd.

Defensive sector outperformance may be a reflection of investor suspicion. After all, owning defensive sectors is one way to ‘throw your hat in the ring’ without actually going all in.

To what extent are defensive sectors currently outperforming economically sensitive sectors?

The lower portion of the chart below shows the ratio of Consumer Staples Select Sector SPDR (XLP) to Consumer Discretionary Select Sector SPDR (XLY). The XLP/XLY ratio is plotted against the S&P 500 (SPY).

We see that extreme XLP outperformance (red lines) in the mid-2000s either held back the S&P or led to a major market top. Extreme under performance (green line) was generally seen towards meaningful market lows.

Currently the XLP/XLY is more or less in neutral territory.

The second chart shows XLP’s 48.62% rally from the August 2011 low (since its corresponding October 2011 low the S&P 500 gained 47.63%).

XLP nearly touched resistance going back to that low, but is trading above short-term trend line support. The behavior of RSI suggests a tired up trend. A close below green support would be the first sign of a correction. A close above the red line would likely reinvigorate consumer staples stocks.

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