As the market continues to rally the big question becomes: Is this rally for real or is this another one of those dreaded bear market rallies? While I am sure everyone would prefer the former, the leading indicators seem to be painting a different picture. In my last article, I spoke about some aspects of the market that still looked bleak, but many of them are considered to be lagging indicators. Therefore, I decided to look at the leading indicators, to see if they are painting a different picture that could bring some more clarity to the situation. I am going to examine the Index of Leading Indicators and its components to see just where this economy might be headed and figure out whether or not this is a rally to believe in.

The Components of the Index

The equity market has taken a turn for the better in the past couple of weeks, reversing losses for many investors who have ridden this market down. It has been a welcome change for investors as we bounce off lows and are beginning to put some faith behind equities again. The million dollar question: is this the turnaround we have all been looking for, or is this just another bear market rally?

In my opinion, this is just another bear market rally. Rallies of 5%+ in one day do not occur during bull markets, but they are very typical of bear markets and normally occur during bear market rallies. What has really changed fundamentally over the past few weeks in the macro-economy? To tell you the truth, not much.

Towards the end of last year anyone and everyone you talked to would tell you one thing about investing in the equity markets: Overweight the healthcare and consumer staples sectors. Two months into this year, in what should not come as a surprise, the pundits were wrong again, with staples ranking 5th in year-to-date performance when compared to the other sectors in the S&P 500. Surprisingly, the information technology sector has performed the best year-to-date of the 10 sectors in the S&P 500. Let me offer my opinion on why the staples sector has underperformed, and what to expect going forward.

Herd Mentality: When all “experts” make a forecast, something else is going to happen: One of the famous market rules written by former Merrill Lynch legend Bob Farrell, seems to be coming true with the staples sector. When everyone agrees about a certain topic, it is normally at the height of the bullishness on the market subject. Staples seems to be a victim of a market where everyone tried so hard to implement a particular investing strategy, that it got to the point where it was not unique. You can't differentiate one portfolio from another.

Looking ahead to 2009, Consumer Staples should continue to be one of the best performing sectors in the market, given its strong fundamental macroeconomic backdrop relative to the other sectors in the S&P 500. We can sit and argue as to whether or not the market will go back up or further deteriorate in 2009, but given the unstable credit and the uncertain housing and labor markets, it is hard to say just what will happen and how much is already priced in. That being said stocks in Consumer Staples should benefit in this environment.

Kroger Company (KR)

One of the most hotly watched economic indicators is the Consumer Price Index (CPI), as it is a proxy for inflation in the US economy. This is an extremely important number, especially given the state of the US consumer and its impacts on yields in the fixed income markets. At the beginning of the year, with sky rocketing commodity prices and increasing food prices we were looking at a period of extreme inflation during the beginning of a downturn, of which we knew very little about. Ever since the collapse in commodity prices and devaluation of every asset class known to man, we have seen a major change from what this indicator has been telling us. It paints a picture of a time of what could be one of the most deflationary environments ever seen in our economy, as the past 3 months have seen negative CPI prints, signaling extreme deflation.

With the Fed undertaking a policy of quantitative easing to stimulate the US economy and the credit markets, many people claim that we will be seeing a very inflationary environment in the near future. The question is, how long can and will deflation persist for, and what are some of the things that will drive inflation or deflation going forward? It is my opinion that we will continue to be in this extremely deflationary environment longer than people think, but let’s see why.

It comes as no surprise that the consumer discretionary sector has been one of the hardest hit sectors, given its heavy reliance on consumer spending, which has declined for 3 straight months- a very rare event in market history. Only the largest cap most stable plays like Nike (NKE) and McDonalds (MCD) have performed well in this environment. But I have a stock for you that has performed just as well (or poorly) as NKE has and offers more upside once the market turns. Historically, after the NBER announces that we are in a recession the markets tend to turn within a month or two. The company I am talking about is Buckle Incorporated (BKE).

Company Description

One of the bigger debates that rages on within the Consumer Staples sector is whether Coca-Cola (KO) or PepsiCo (PEP) is a better investment. The two carbonated and non-carbonated soft drink manufacturing behemoths take up over 70% of the world wide beverage sales and have been solid equity holdings since well before I was born. Raising dividends and consistent earnings might as well be each company’s middle name, but the debate of which one is better still rages on. While both are solid investment ideas, they are still fundamentally different in many ways. Let’s take a closer look at the companies.

Beverage Trends

Finding solid investing ideas in this market has not been the easiest thing. With the housing market and credit markets still unraveling, companies and consumers alike are finding themselves strapped for cash, as they try to reverse years of highly leveraged balance sheets and bad habits in dealing with their money. Volatile markets have scared off even some of the riskiest investors as 300 point swings in the Dow seem to be nearly a weekly occurrence.

One company that has stood the test of time and should continue to perform well is Wal-Mart (WMT). Most of you have probably shopped at Wal-Mart at one point or another, especially nowadays, as most consumers have had to cut down on discretionary spending. So why do I like Wal-Mart? Let’s find out.

Procter & Gamble (PG) is one of the largest consumer goods manufacturers in the world, providing goods from household toiletries to food and batteries. You might recognize some of their most popular brands such as Crest, Tide and Pringles.

Given the current state of the equity markets, an investment in the Consumer Staples sector is something that any investor can/should have in order to limit their risk and volatility with this market. With a consumer recession likely within the next few months, most people will not be buying their high-end gadgets and gizmos. But I can guarantee you consumers will still buy their household goods because I’m sure they will still want clean clothes and clean teeth regardless of the state of the economy.

Under Armour (UA) [26.63, 0.00 (0.00%)] is one of the lead developers and distributors of branded performance apparel, footwear and accessories for all types of athletes. They produce products in three main segments: Apparel, which includes their blockbuster shirts that are developed to keep the body cool during extreme conditions; Footwear, which consists of cleats for football, baseball and softball, but has some great growth prospects; and other products, such as gloves for football and baseball.

The company has gained market share in these regions at an alarming pace over their past few years due to their synthetic fabrics that are designed to keep perspiration away from the skin to help regulate body temperature. They do operate in a very competitive environment, with some well developed competitors such as Nike (NKE) [57.24, 0.00 (0.00%)]. Under Armour can be considered one of the biggest growth stories, but has to be approached with caution in the near term.