Consumer Staples Pounded in High Volume: Rotation or Bearish Omen?

|
 |  Includes: ADM, AVP, CAG, CCE, CL, COST, CPB, CVS, EL, GIS, HSY, K, KHC, KMB, KO, KR, LO, MDLZ, MJN, MO, PEP, PG, PM, RAI, SYY, WBA, WMT
by: Alan Brochstein, CFA

As I was driving back after visits with 13 companies in 3 Midwestern states on Friday, I was unable to see the damage as it was being done to the leading Consumer Staples companies during the trading session. Reviewing the activity this weekend, though, I find it shocking. Here is what it looked like for the S&P 500 companies with market capitalization in excess of $10 billion (click to enlarge):

Consumer Staples Slaughter 062510

As you can see in the table above, the larger Consumer Staples stocks fell broadly despite the overall market rising, with most of the stocks having above-average volume and the largest ones having exceptionally high volume. The Wal-Mart (NYSE:WMT) and Procter and Gamble (NYSE:PG) sell-offs entailed the highest volumes this year for both names. It was the Russell rebalancing, so that served as a variable that may have been at play, but I don't believe that to be the case here. I would also note that several other leading large-cap names sold off on exceptionally high volume too (Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT), GE, Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), Chevron (NYSE:CVX) and Intel (NASDAQ:INTC)). It looks to me like a very large program executed on a day of high liquidity, but that's just a hunch.

I believe that there are two possibilities here, each with diametrically opposed potential conclusions. On the one hand, someone could have been exiting en masse to invest in other sectors, potentially Financials following the announcement of the new regulatory rules out of Congress. Note that the Financials sector for the S&P 500, which is much larger than Consumer Staples, rose a whopping 2.81% on Friday. Even after the rout Friday, the overall YTD return for Consumer Staples is close to the market return (-3.16% price return compared to -3.44% for the S&P 500). Financials are in third place (behind Industrials and Consumer Discretionary), with a 1.68% YTD price return. Meanwhile, Small-Caps had a great day too, but it's hard to conclude that it was part of this rotation.

The alternative possibility is that the selling is just distribution and signaling more bad to come. I find this difficult to accept given what appear to be fairly modest valuations in the sector and a lack of relative outperformance leading to the dumping. When they were dumping these stocks in late 2008, it's because it was "the only thing left to sell" (though everything kept falling nonetheless). Still, this could be a sign that investors don't even want the "safe stocks". Bonds, REITs, MLPs, etc. seem to be in favor. Another safe sector that was absolutely hammered during the week was the Utilities.

Several of the charts of leading Consumer Staples companies as well as other Mega-Caps look quite challenging, so how they behave in the coming days will be important. For now, I am viewing this strange action as potentially positive - it looks like rotation out of the largest stocks.

Disclosure: Long KO and WAG in the Conservative Growth/Balanced Model Portfolio and WAG in the Top 20 Model Portfolio