Earlier this week I charted airline stocks. I noted the major carriers, which earn significant revenue from business travel, were outpacing discount airline stocks. I believe this is a positive sign for the economy going forward.
Another potential positive is the sudden downturn in consumer staples stocks. These names focus on consumer necessities that will be purchased regardless of economic conditions. Examples include detergent, diapers and toothpaste. Defensive stocks tend to outperform the market during a recession.
While the major stock indexes are off to a strong start this year, the consumer staples sector hasn't participated in the recent rally. Is this a sign that a recession can be avoided? Let's go to the charts to find out.
First, we'll chart the S&P Consumer Staples SPDR (XLP) against the S&P Consumer Discretionary SPDR (XLY) . The chart measures activity since the start of the fourth quarter of 2022.
Since late December, consumer discretionary stocks (green) have been on a roll while consumer staples stocks (blue) have been slipping. The S&P 500 SPDR (SPY, black) demonstrates overall market activity. While consumer discretionary stocks are moving with the market, consumer staples stocks are not.
Source of charts: TradeStation
A good example of a consumer staples stock is J.M. Smucker Co. (SJM) . This stock was my top pick for 2022. In addition to jams and jellies, Smucker produces the Folgers and Dunkin coffee brands as well as Jif peanut butter and Milk Bone dog biscuits.
Last year, J.M. Smucker outpaced the major indexes, gaining 16.67% in a down market. The stock's trend is still bullish (black lines), with its 50-day (blue) and 200-day (red) moving averages still rising.
However, the stock's recent pullback in a strong overall market could be an indication that capital is rotating away from this sector. I'm not closing my Smucker position, but I am reducing its size.
I'll roll those proceeds into Starbucks (SBUX) , which is clearly in the consumer discretionary category.
Starbucks is in a bullish trend and trades above its 50-day (blue) and 200-day (red) moving averages. The stock has formed a cup-and-handle pattern (curved black lines). This formation suggests Starbucks could reach $112 soon. Starbucks is trading less than 1% below its 52-week closing high.
In a sense, I'm replacing a $1 cup of coffee with a $6 cup of coffee. I'm attempting to get the jump on a potential market rotation away from consumer staples and into consumer discretionary.
