The McClellan Summation Index for defensive sectors nears a record

Key points:

• The McClellan Summation Index for Staples, Utilities, and Health Care are all above +1000
• This is one of the strongest combined readings in those defensive sectors in 70 years
• Prior signals led to mostly higher stocks 6-12 months later

Impressive long-term internal recoveries in the most defensive sectors

Consumer Staples stocks have been on a roll. In December, we saw that those stocks were seeing an impressive thrust and longer-term recovery, which has tended to see further gains in the months ahead.

So far, that's been the case. The McClellan Summation Index for Staples is now well above +1000, one of its highest readings in a decade.

It's not just Staples. Another core defensive sector, Utilities, is also seeing impressive internal momentum.

And so is the other one, Health Care.

The Summation Index for all 3 sectors is now well above +1000, and their combined value is now in the top 1% of all days since 1952.

Not a sign of an impending bear market

It's assumed that if investors are so hyper-focused on defensive stocks, it's a bad omen for the broader market. Not to be. While the S&P 500 didn't exactly go gangbusters after these signs of long-term internal momentum in the defensive sectors, it still showed above-average returns. It was rare to see a loss over the next 6-12 months.

The Risk/Reward table shows small drawdowns with 2 exceptions (2011 and 2020). Outside of those two dates, the S&P didn't lose more than 6% at any point within the next 6 months. By comparison, 13 of the signals showed a gain of more than +6% at some point in the next 6 months.

A (mostly) good sign for the sectors, too

The most impressive performance for the sectors themselves was longer-term, except for Utilities. That sector always seems to have problems holding any kind of upside momentum extreme.

The table below shows each sector's return following the signals in the tables above, as well as their performance relative to the S&P 500.

There are some signs of overheating. Earlier this week, 100% of Staples stocks traded above their 50-day moving averages. The Backtest Engine shows that XLP showed a positive return over the next 2 months after only 3 out of 18 prior signals.

What the research tells us...

There have been thrusts across various time frames in the broad market, within the S&P 500, and even more so in some defensive sectors. While that could be taken as a negative sign of risk-off behavior for stocks in general, historically, that has not been the case. Strong and broad recoveries in Staples, Utilities, and Health Care, have preceded medium- to long-term gains in the S&P 500 with few exceptions. The signals were also good for the defensive sectors, though not for Utilities.