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Chart Advisor: Stop Being So Defensive

Posted September 13, 2023 at 8:24 am

By Gordon Scott, CMT

1/ Wants Over Needs

2/ Amazon Up Target Down

3/ Don’t Discount Walmart

4/ Outrunning Disney’s reach

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1/ Wants Over Needs

When markets get offensive and ugly, shrewd investors get defensive. If you haven’t heard that play on words, or something like it, then you might think it has something to do with investor psychology. It doesn’t. 

Defensive stocks, so called, are those that a portfolio manager would consider safer. These are the kind of stocks that make it easier for your portfolio to defend against losses. 

Companies behind defensive stocks tend to make things consumers can’t live without–the things they seem to need. They are characterized by less volatile prices and dividend payments. Defensive stocks were a safe haven in 2022, but not so much in 2023 as the left panel of the chart below demonstrates. 

In 2023, cyclical stocks seemed to do better. The companies behind cyclical stocks tend to make things consumers want, not just need. State Street’s SPDR Consumer Discretionary Sector ETF (XLY) tracks the wants, while its Consumer Staples Sector ETF (XLP) tracks the needs. 

Over the course of the year, the wants have strongly outperformed the needs, but during the summer it looked like that price action might begin to reverse. The right-side panel in the chart above shows that just last week the wants have gotten back on track. 

The panel shows an hourly chart that tracks prices of XLP and XLY since the beginning of August. The new trend shows that the discretionary sector ETF (which works as an average of cyclical stocks) is back to outpacing the staples sector ETF and its defensive stocks.

2/ Amazon Up Target Down

Perhaps the relative strength of XLY over XLP will reverse after investors digest the latest Consumer Price Index (CPI) report, but it is doubtful. That means it might be worth looking among the top holdings of XLY to find which stocks are surging ahead.

The chart below compares XLY with a few of its most influential holdings including: Tesla (TSLA), Amazon (AMZN), Costco (COSTCO) and Target (TGT). 

TSLA is doing most of the heavy lifting here. Stocks that tend to be strong going into a trend also tend to continue to show relative strength and the trend continues. What stands out is the relative weakness of Target (TGT), which has broken new lows in the past couple of weeks even while it failed to make a new high along its downward trendline. 

3/ Don’t Discount Walmart

Now if the U.S. Dollar Index (DXY) continues its upward trend, XLY will meet with headwinds and stocks in that sector should begin to show declining prices. The past two issues of the Chart Advisor explained why this is unlikely to happen, but there are so few guarantees when it comes to market prices, and this is not one of them. 

If inflation pressures drove customers away from things they want and forced them to focus on things they need, then XLP would become a better investment. The stocks within it would stand out as old reliable choices. The chart below compares a few of these with XLP including:  Coca Cola (KO), Pepsico (PEP), Procter & Gamble (PG), and Walmart (WMT). 

Of these four only WMT has made reasonable gains so far this year, the others have underperformed the S&P 500 (SPX) and run close to breakeven.

4/ Outrunning Disney’s reach

One stock in the Consumer Discretionary sector isn’t following the same trend as the others. In this case, that’s not a good thing. The trajectory of share prices for Disney (DIS) shows that the stock has lost 27% of its value since its high at the beginning of 2021. In fact, Tuesday’s low was within 1% of the lowest price traded during the pandemic (see chart below).

This is a bad look for DIS investors, because by now the downward trend may simply gain momentum heading all the way to the end of the year. However, if the trend were to reverse, the current price level represents a relative bargain. One thing that could nudge the trend back upward is the performance of teams in the National Football League (NFL). 

That’s because Disney’s biggest source of revenue is ESPN, and the NFL is the biggest source of revenue for ESPN. The larger the interest, stadium attendance and TV audiences, the larger the ad revenue. 

There’s an odd connection between football teams and the stock market. It is known as the Super Bowl Indicator. The general premise of the indicator is that if teams in the National Football Conference (NFC) win the Super Bowl, then it is better for the stock market the following year. So if you aren’t a fan of the Dallas Cowboys or one of the other NFC powerhouse teams, then you may want to hold your nose while you cheer them along anyway!

Originally posted 13th September 2023

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