Consumer Staples remains under pressure, & worse than Discretionary

US Equity indices and Treasury yields remain quite choppy, but the weakness coinciding with Yields pushing up still looks to extend this week which is one of the more seasonally bearish weeks of the Fall.   Trends and momentum are short-term negative.  Only on a TNX break under 4.05% would it be right to trust an Equity bounce in September

Tuesday brought about a break of early September lows for SPX.  This keeps the near-term trend negative, and Treasury yields are on the verge of breaking out to new 2023 highs.  Five-Year and 10-year Treasury yields did successfully achieve late day breakouts in Tuesday’s trading.

While the Treasury decline looks to be in its late stages, there doesn’t appear to be much technical reason for Yields to rollover.  DeMark exhaustion likely will take another 2-3 weeks.

Factors like cycles, sentiment, Elliott-wave structure and DeMark exhaustion indicators all suggest this yield rally is in its latter stages.   However, it seems premature that this might happen as of mid-September based on Wednesday’s outcome.

Overall, I suspect that SPX and QQQ might find it difficult to immediately break down under August lows, and any SPX weakness down near 4400 likely creates an attractive Risk-reward into end of quarter.

Reasons for optimism include the following five reasons:

1. September’s negative seasonal bias coming to end by end of quarter.
2. Technology has held up better than expected over the past month
3. Yields and DXY look to be within 2-3 weeks of stalling out and rolling over.
4. Sentiment has begun to grow more pessimistic
5. Intermediate-term cycles in 2023 show a bullish projection into 2024

Overall, SPX’s break of early September lows does not look to be a positive.  However, this pullback from 9/14 peaks might be related to the initial selloff from 9/1, which would be equal in length near SPX-4400.

While there remain concerns about the degree of breadth erosion and poor September seasonality, there hasn’t been meaningful downside volatility and Technology is holding up relatively quite well over the last month.

I suspect that the Yield breakout likely will create a bit more weakness this week.  However, until there is evidence of SPX undercutting 4335, I view this as a good risk/reward near 4400 for a bounce into October.  I’ll address this in greater detail by end of week.

Equal-weighted Consumer Staples has proven to be even more negative than Consumer Discretionary

Over the past month, Equal-weighted Consumer Staples sector has proven to be the worst performing sector of any of the 11 major Sector ETF’s, having lost over 4% (Invesco’s Equal-weighted Consumer Staples ETF (RSPS -0.28% ) on a rolling 1-month period.

However, the SPDR Select S&P Consumer Staples ETF (XLP -0.21% ) is down just -2.03%, or nearly half that amount.  Much of this relative outperformance stems from heavy weightings in stocks like PG -0.78% , PEP 0.46% , COST 1.01% , KO 0.00% , and WMT, which represent nearly 50% of the entire XLP -0.21%  as of 9/19/23 (48.83% exactly)

Thus, the broader Consumer Staples space has proven to be a much worse performer than the XLP.  Technically, the break in relative weekly charts of RSPS -0.28%  to RSP 0.04%  (Equal-weighted S&P) has brought Staples to the lowest relative levels since Spring of 2022, having undercut three prior lows.

Staples remains a relative laggard in performance, and until this sector can begin to trade better and recoup the recent area of its support breakdown, along with break out above its ongoing downtrend from earlier this year, it should be considered a technical Underweight.

There are some stocks that remain quite attractive within Consumer Staples that I endorse technically, and those are the following:  MNST 0.41% , COST 1.01% , WMT, STZ, and MDLZ -0.27% .

However, some of the stocks that have shown the greatest amount of deterioration in the last month such as GIS, SJM, EL 1.70% , and CAG -0.61% , require patience as none of these seems to have officially bottomed.

Consumer Discretionary continues to look better than Consumer Staples

While my Monday post-close technical comments addressed the recent deterioration in groups like Consumer Discretionary, this weakness has actually proven to be more pronounced in the Staples sector.

Despite the weakness in many Retail and Casino names, the upward slope of the relative chart between Equal-weighted Consumer Discretionary to Equal-weighted Consumer Staples (RSPD 0.40%  vs. RSPS -0.28% ) is ongoing since last Summer, and still looks to push higher. 

This is technically interesting and a positive given that Discretionary has been trending up vs. Staples despite the US Stock market having wobbled a bit since late July.

The lack of defensive strength by either Staples, nor REITS seems to be a reason for optimism, not a reason to avoid US stocks based on seasonal worries.

Upward sloping trends in ratios of Consumer Discretionary to Consumer Staples normally are seen during bull markets, while bear markets bring about strength in Consumer Staples.  Overall, it seems like we’re seeing the opposite now. 

Bottom line, both sectors, Discretionary and Staples seem headed lower in absolute terms, and investing in Consumer stocks requires some selectivity.

VIX vs. VVIX looks to have bottomed

This relative chart of VIX to VVIX (CBOE VVIX index (VIX of the VIX) has broken out of intermediate-term downtrends from this past Spring.

Technically, while trying to time technical movement in the CBOE VIX index can often prove difficult, it tends to be easier to spot breakouts and breakdowns when plotting the VIX vs. the VVIX.

As shown below, this has pinpointed clean breakouts of multi-month uptrends and downtrend that have been effective in showing implied volatility turning lower and higher, respectively.

2018 had two different times when VIX broke out vs VVIX, along with early 2020 ahead of the big February decline.  Furthermore, this also turned up sharply just ahead of 2022’s bear market.

Overall, this remains a ratio chart which I feel can aid in trying to time movement in VIX.

This breakout which happened in late July should lead VIX higher over the next 1-2 months given the VIX having begun to relatively outperform VVIX.

Overall, while my analysis suggests that US equities might bottom ahead of a break of August lows, I sense that rallies into October would provide an additional chance to own implied volatility at relatively cheap levels.

Given that VIX traded near 18 one month ago (8/18 intra-day peak was 18.88, and now trades 14.11) it makes owning implied volatility seem attractive given that uncertainty regarding the FOMC’s guidance, nor the possibility of a Government shutdown really hasn’t subsided.

My anticipation is that VIX likely trades back up to the mid-20’s, or even might test Spring 2023 peaks near 31.  However, I don’t suspect this will happen right away, but should be an October-November occurrence.