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Get Ready to Buy Consumer Staples

May 05, 2011 1:08 PM ETXLP, CAG, PEP, KMB, SWY, LEG, ETD
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Seeking Alpha Analyst Since 2010

Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the technical indicators that Mr. Aspray wrote about in the 1980s, such as the MACD, have since gained worldwide acceptance. Tom is regular contributor to Forbes where he writes a regular Week Ahead column.  His expertise as a technical analyst has been acknowledged by the WSJ as well as some of the best known technical analysts.

The consumer staples sector has emerged as a leader, and an impending pullback should present a golden opportunity to buy the strongest stocks at attractive levels.

With stocks under pressure this week, there has been increased interest in the consumer staples sector, and Ralcorp’s (RAH) rejection of ConAgra Foods’ (CAG) bid has stoked the fires.

The disappointing ADP jobs report on Wednesday has renewed concerns over the economic recovery, and the focus on Friday’s monthly employment report is now even more intense. If the economy does soften or the recovery stalls, the goods that consumer staples companies sell should remain on the must-have list.

This quarter, the Select Sector SPDR - Consumer Staples (XLP) is up 5.6% versus 1.6% for the S&P 500. The technical action of XLP suggests that a pullback is likely in the next few weeks.

The major breakouts in some of the big-name consumer staples stocks should allow for some excellent opportunities to buy on a pullback. There is one in particular that I want to bring to your attention, and I will also update the stocks featured recently in “7 Ways to Profit from Consumer Staples.”

Click to Enlarge

Chart Analysis: The Select Sector SPDR - Consumer Staples (XLP) has been testing its starc+ band over the past few sessions, and the weekly starc+ band was at $31.94 this week. This suggests that this is a high-risk time to buy and increases the odds of either a setback or some consolidation. (Learn more about starc bands here.)

  • The minimum targets from the completion of the trading range, lines a and b, has been met. There are additional targets in the $32.60 area
  • The first good support is in the $30.50-$31.10 area with much stronger support at $29.50-$30. A violation of the March 16 lows at $28.71 would be negative
  • The daily on-balance volume (OBV) confirmed the upside breakout by surging above the resistance at line c. The weekly OBV (not shown) also looks strong

Pepsico Inc. (PEP) broke through major resistance last week in the $68.40 area (line d), which gives upside targets in the $72-$74 area.

  • The 2008 high for PEP was $73.20 with the all-time highs at $79.79
  • There is now good support for PEP at $66-$67.50 with the rising 20-week exponential moving average (EMA) at $65.24
  • The key support level for PEP is at $62.05 and the March lows
  • The upside breakout was supported by the volume as the weekly OBV moved through multi-year resistance at line f. The daily OBV (not shown) is also acting strong

Click to Enlarge

Kimberly-Clark Corporation (KMB) was one of my selections in the consumer staples sector, as I liked the technical pattern, as well as its 4.3% yield. KMB’s earnings disappointed the market, and on Monday, April 25, the stock gapped over a dollar lower and traded as low as $63.40, holding above the March lows at $63.06.

  • This is one of those examples where bad earnings created a great buying opportunity, as KMB has moved sharply higher in the past week, closing Wednesday at $67.24
  • KMB looks ready to overcome the resistance from 2008 at $67.50. A breakout would project a move to the 2007 resistance at $71-$72.70
  • The daily OBV started to show accumulation in March and has now surged to the upside. The weekly OBV (not shown) has convincingly broken its downtrend
  • Initial support is now at $66-$66.50 with stronger support in the $65 area. It would take a break below $63.40 to turn the outlook negative

Tata Motors Ltd. (TTM) was my oddball staples pick that has not worked out well. The surprise Indian rate hike has hammered the Indian stock market, and TTM has gapped through support at line e.

  • This confirms that the chart formation (lines d and e) was a continuation pattern and not a short-term bottom. Next support is at $25 and then key support resides at $23.25 and the February lows
  • The daily OBV failed to move the resistance at line c, and has now broken its uptrend. This is clearly a negative formation
  • TTM has initial resistance now at $26.30-$27 and it would take a close above the April highs at $28.34 to turn things around

What It Means: The increased attention by the financial media on the consumer staples sector (it was featured on two networks yesterday) and the nearness of sector ETF XLP to its starc+ bands suggests the sector may be ready for a rest.
In addition to PEP, there are several other consumer staples stocks that have been able to overcome major resistance and should be bought on a pullback. I will have more on these stocks in the coming weeks.

How to Profit: I previously recommended going 50% long XLP at $30.36 and 50% long at $30.14, but XLP only got as low as $30.71. I now recommend going 50% long XLP at $30.76 and 50% at $30.24 with a stop at $29.44 (risk of approx. 3.5%).

For PEP, go 50% long at $67.84 and 50% at $66.88 with a stop at $63.78 (risk of approx. 5.2%). On a move above $71.50, raise the stop to $66.28.

Consumer Staples Portfolio Update

Kimberly-Clark Corp. (KMB): Buyers should be 50% long at $66.18 and 50% long at $65.52. The original stop at $62.74 held. On a move above $68.15, raise the stop to $65.34 and sell half the position at $72.44.

Tata Motors (TTM): Buyers should be 50% long at $27.72 and 50% long at $26.92 with a stop at $24.82. Though nimble traders may be able to close out longs on a bounce to $26.32, I would close out longs on the market open.

Ethan Allen Interiors (ETH): Buyers should be 50% long ETH at $23.22 and 50% long at $22.66, and I would recommend raising the stop from $21.46 to $21.88. On a move above $24.60, raise the stop to $22.34 and sell half the position at $27.38.

Leggett & Platt (LEG): I recommended going long at $23.18, but it never went below $23.48 and the stock closed on Wednesday at $26.06. I will look for a new entry point if we get a decent pullback.

ACCO Brands (ABD): Buyers should be 50% long ABD at $9.66 and 50% long at $9.32. ABD recently closed at $9.48. Raise the stop to $8.97. On a move above $10.05, raise the stop to $9.39 and sell half the position at $11.22.

Safeway, Inc. (SWY): I originally recommended SWY at $21.87 and half the position was sold at $23.84 or better in early April for a quick 9% profit. It has corrected a bit more sharply than I would like, closing Wednesday at $23.99. Use a stop on existing longs at $23.28. We did not get a pullback to $23.56 for establishing new long positions, and I would now cancel this order. 

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