Consumer staples has emerged a clear sector leader for the typically defensive summer months, and three stocks and the primary ETF tracking the group are compelling buys now.
Nice gains in the stock market after the long holiday weekend have helped some forget the sharp decline that led into the May 21 lows. The Spyder Trust (SPY) closed Tuesday 3.2% above the lows for the month at $129.55.
The rally has relieved the oversold readings from many of the technical studies I discussed when the market was making its lows. The McClellan Oscillator, a short-term Advance/Decline (A/D) indicator, has risen from -335 to +34 and is no longer oversold.
The futures are weak in pre-trading on new Eurozone concerns and a close below Tuesday's low will suggest that the rebound is over. This makes a test or even new correction lows likely as we head into June.
As May draws to a close, there are three consumer staples stocks where the monthly analysis (chart, volume and relative performance) suggests they will be leaders during the difficult summer months. All have attractive yields, and the Select Sector SPDR - Consumer Staples (XLP) also looks good for new buying.
Chart Analysis: Reynolds American Inc. (RAI) is a $24.2 billion cigarette company whose stock currently yields 5.6%. The monthly chart shows a tight range over the past five months with a low of $38.95 during the month of January.
- The chart shows what appears to be a flag formation, lines a and b, which is likely to be resolved to the upside
- A close above $43 will complete the continuation pattern with initial upside targets at $47 and then in the $50-$52 area
- Monthly relative performance, or RS analysis, has turned up nicely and is back above its weighted moving average (WMA)
- The strong long-term uptrend (line c) in the RS shows that RAI has been outperforming the S&P 500 for many years, including a 27% gain in 2011
- Monthly on-balance volume (OBV) broke through resistance in early 2011, line d
- OBV turned up in May, and volume has been heavy through the month
- There is initial price support at $41-$41.40 with stronger support in the $40.50-$40.80 area
HJ Heinz Company (HNZ) is a $17.1 billion food company that currently yields 3.6% and raised its dividend by more than 7% last week. At the same time, however, the company lowered its growth forecast for the coming years.
- The monthly chart shows a very tight range over the past year, as the resistance at $55, line f, has not been convincingly overcome. This year's low is $51.36
- The monthly RS line has turned up sharply and is not testing its weighted moving average. It has formed higher lows since early 2011, line g
- Volume increased in May, and the OBV looks ready to close above its weighted moving average and the previous high
- OBV shows strong support at line h
- There is initial price support in the $52.20-$53 area
Hormel Foods Corp (HRL) is an $8 billion food company whose stock currently yields 2%. It reported record second quarter profits last week and the share price is up by more than 3% since May 21.
- The monthly chart shows that the flag formation, lines a and b, is likely to be completed with Thursday's close
- The 127.2% Fibonacci target is at $32 with further targets in the $35-$36 area
- Monthly RS line has been in a strong uptrend since 2008, line c, which is consistent with its role as a market leader
- RS line will close the month back above its weighted moving average, and the weekly RS (not shown) is also positive
- Monthly OBV broke through major resistance, line d, in 2010. It is below its weighted moving average but the weekly OBV (not shown) has confirmed the highs
- There is initial price support now at $29.60-$29.80
The Select Sector SPDR - Consumer Staples (XLP) looks ready to close unchanged for the month, but it has been stronger than the S&P 500 since the early-April highs. The fund currently yields 2.64%. The February close was well above the major monthly resistance at $32.45, line a.
- The upper parallel resistance line is now in the $35-$35.50 area
- RS line has turned up from its flat weighted moving average and is close to breaking through major resistance at line g. This is likely to happen this summer
- Monthly OBV confirmed the price action when it overcame the major resistance, line h, in 2011
- Monthly OBV has good support at line i, and the weekly OBV (not shown) confirmed the recent highs
- There is first support now at $33.50-$33.80
What It Means: While there is yet no evidence that the market's decline has been completed, these three stocks look very attractive on account of their monthly analysis.
On further weakness in the major averages, these stocks should also pull back to good monthly support where the risk/reward on new longs will be favorable. All three also have quite attractive yields.
In early January, I recommended Reynolds American Inc (RAI) at $38.74. That position was stopped out at $40.54 on April 24 for a 4.6% gain. In hindsight, I probably pushed the stop level up too tight.
How to Profit: For Reynolds American Inc. (RAI), go 50% long at $41.70 and 50% long at $41.28 with a stop at $38.74 (risk of approx. 6.6%).
For HJ Heinz Company (HNZ), go 50% long at $52.74 and 50% long at $52.32 with a stop at $50.42 (risk of approx. 3.8%).
For Hormel Foods Corp (HRL), go 50% long at $29.82 and 50% long at $29.26 with a stop at $28.32 (risk of approx. 4.1%).
For the Select Sector SPDR - Consumer Staples (XLP), go 50% long at $33.80 and 50% long at $33.16 with a stop at $31.72 (risk of approx. 5.4%).
Portfolio Update: For short-term traders who are long the SPDR S&P Oil & Gas Exploration ETF (XOP) at $49.06 or better, sell half the position now and use a breakeven stop on the remaining position.
Editor's Note: A friend and excellent analyst, Buff Dormeier, informed me that Amazon.com is offering a Kindle version of his book, Investing with Volume Analysis, for free! The book normally sells for $49.95, and this special may end this week, so be sure to claim the offer here. I do not receive any remuneration for this, but I think his book is the best new work on volume analysis.