Follow tech stocks! Is the consumer necessities sector rising fast or not?

Consumer necessities stocks were among the top performers in the stock market over the past month. The benchmark S&P 500 index has fallen 0.9% since December 10, while the S&P 500 Consumer Staples Index (S&P 500 Consumer Staples Index) has risen 4%.

As we all know, consumer necessities are stores and items that people cannot live without in their daily lives, such as grocery stores, food companies, and household goods manufacturers such as toilet paper, toothpaste, and garbage bags. These are all sources of major necessities.

Regardless of the economic situation, people always have to go to these stores to buy these products, so these companies don't need to experience drastic demand fluctuations like other economic sectors. Additionally, due to their stability, these companies often pay growing dividends to shareholders on a regular basis.

The combination of these two major advantages makes consumer necessities a “risk-averse” sector. Investors tend to transfer capital to this sector when other sectors of the market seem risky.

Recently, the stock market is quite risky. The S&P 500 Information Technology Index (one of the most popular “venture capital” sectors) has fallen 5% in the past month, and many individual stocks within this sector have fallen even worse.

However, the rise in consumer goods stock prices may lose momentum, at least in the short term.

One of our favorite ways to assess trader sentiment is to look at the Bulls Percentage Index (BPI). BPI tracks the percentage of stocks in a sector that are in a bullish state, with a value range of 0 to 100.

When BPI falls below 30 or 30 (oversold region), it sends a buy signal, then BPI turns higher. When BPI reaches 80 or above 80 (overbought region), it signals to sell, then BPI turns lower.

The figure below shows the popular daily consumer goods ETF-SPDR (XLP) and the BPI of the consumer necessities sector, marked with the black line and blue line on the chart, respectively.

In the past two years, the BPI for consumer necessities has reached the overbought level 4 times. The first 3 times all occurred in 2020. In the next few months after hitting the overbought level, XLP will always plummet or pull back.

Now for the fourth time, from December 1 to January 4, XLP rose 11%. On Friday, January 7, the BPI for consumer goods reached 91, entering the overbought region. On January 11, BPI fell for the first time since the end of November and was below 88 at the close of the day.

The drop from 91 to 88 indicates a trend change, which is a selling signal released by the consumer necessities sector.

These signals don't always come out right away, but most of the time, they're a good trading reminder.

If you're making a long-term investment in consumer necessities stocks, or even if you're “trading for dividend income,” this isn't a reason to panic and exit your position. After selling signals were released in April and September 2020, XLP fell by only 6% and 7%, respectively, from peak to low. Therefore, if your investment or trading style is long-term, you are likely to be able to survive periods of volatility.

However, if you bet on rising consumer goods stocks as a form of short-term speculation, now may be a good time for you to take profit.

Or if you're considering buying or going long in the consumer essentials sector, you may have a better chance of entering the market in the next few days or weeks.

If you haven't made any investments in the consumer essentials sector, we recommend watching for the changes. We're looking for bearish trading opportunities within this sector, but haven't found anything worth focusing on.

However, by observing the price trends of consumer necessities stocks and other market segments over the next few weeks, you will gain in terms of accumulating market experience.

(The opinions in this article only represent the author's personal opinions and are not used as any investment advice. Investment is risky, so you need to be cautious when entering the market)

Analysts: Ben Morris, Drew Mcconnell

Compiled by Samantha