Costco Wholesale Corporation

215.7700 325.2600
52 weeks
52 weeks

Mkt Cap 141.59B

Shares Out 439.79M

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The Magic Of Consumer Staples

Sometimes the greatest things in the world are right there in front of you.

Of all the charts I look at and indicators that we include in our process, Consumer Staples relative to the S&P500 has to be one of the most valuable. And for that matter, one of the more simpler tools to use.

Consumer Staples are the things we’re theoretically going to buy even if there’s a recession or the economy is doing poorly. No matter how bad things get, we’re still going to drink beer, smoke cigarettes, brush our teeth, wash our dishes and so forth. Those stocks tend to outperform when the rest of the stock market is falling. Some of the top holdings of the S&P Consumer Staples Index include Colgate-Palmolive, Philip Morris, Procter & Gamble, Coca-Cola and Pepsi.

These stocks represent consumer staples and tend to pay higher dividends and are less volatile than the overall market. We call that “lower beta”, because it makes us sound smarter.

Anyway, you can see in this chart how helpful the relative strength in staples has been in identifying trends and turning points:

As the black line goes up, that means Consumer Staples are underperforming. When the black line is falling, Staples are outperforming. You’ll notice how at the 2007 stock market high, the 2015 high and the 2018 high all included divergences between Staples relative strength and the S&P500. The inability for Staples to make new lows on a relative basis in 2018 (new high in this chart) was one of the reasons we were so bearish throughout the 4th quarter that year.

You can also see how at the historic lows in 2009, the black line was already making a higher low. That was evidence that staples were already underperforming, which is consistent with higher stock prices, not lower ones.

Well here we are today and Consumer Staples are making new 52-week lows relative to the S&P500:

The breakout in this chart suggests we’re in an environment where stocks as an asset class are going up, not down.

When stocks are going up, it historically pays much better to own them rather than be selling them short.

If we’re above those April highs in this ratio, the weight-of-the-evidence continues to suggest that we spend our time looking for stocks to buy and not looking for stocks to sell.



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