A bullish momentum signal for a traditionally defensive sector

Key points:

• The S&P 500 Consumer Staples sector triggered a price momentum buy signal
• After similar alerts, the group was higher 93% of the time over the next year
• While returns for Consumer Staples are positive, the index tends to underperform the broad market

Price momentum for the Consumer Staples sector 

Last week my colleague Jay Kaeppel published a research note highlighting a bullish seasonal trend for the Consumer Staples and Health Care sectors. 

The bullish side of the ledger for the Consumer Staples sector looks more compelling now that a price momentum indicator registered a new buy signal.

For only the 16th time in the post-WWII era, the traditionally defensive sector registered a deviation from trend buy signal. The system measures the 4-week moving average for the sector relative to the 40-week average. An alert occurs when the ratio between the two averages cycles from less than 0.93 to greater than 1.04.

Similar reversals preceded positive returns for the sector

When the ratio between the short and long-term moving average for the Consumer Staples sector cycles from < 0.93 to > 1.04, the traditionally defensive group shows solid returns and win rates across almost all time frames, especially a year later. 

Typically, the signals occur after significant drawdown periods for the broad market. The alerts in 1998 and 2000 were unusual as they happened near the beginning of the Dotcom bust. 

Only 2 out of 15 signals showed a max loss drawdown of greater than -10%, and only one of those precedents occurred in the first two months.

When I apply the signals to the S&P 500, returns and win rates look solid. The Consumer Staples momentum signal typically coincides with bullish broad market price action found in the early stages of a new bull market. 1947 and 2000 are the exceptions.

Suppose I net out the difference in returns between the Consumer Staples sector and the S&P 500. In that case, Consumer Staples underperform the S&P 500 across most time horizons, especially as the new cycle matures.

What the research tells us...

Price momentum for the Consumer Staples sector cycled from bearish to bullish. After similar precedents, the group was higher 93% of the time over the next year, with only two max loss drawdowns greater than -10%. Historically, the shift in momentum occurs after the broad market transitions from a bear to a bull market environment. While returns for the Consumer Staples sector are solid, history suggests the traditionally defensive group could underperform the S&P 500.