Following KO’s weak report this morning, the consumer staples sector is the worst performer so far today. Weakness in the staples sector is not new though. XLP, the staples ETF, is flat in the past 3 months, much weaker than the broader market’s performance.
An important shift within the U.S. market is taking place among traditionally defensive sectors. Health care is becoming increasingly favored, while staples and utilities are falling out of favor. There are good fundamental reasons for this shift (see posts here and here). Health care offers the best valuation vs. growth tradeoff among the “safe” sectors.
On a technical basis, the shift has come to an interesting juncture. XLV, the health care ETF, is right at all-time highs ($50.40 was the intraday high in May):
Meanwhile, XLP is trading below its April high, and showed more weakness on the recent decline:
But what most intrigues me is that the strength in health care relative to staples is a multiyear phenomenon. I mentioned the potential for strength in this ratio in the long run back in Sept 2012. Revisiting the XLV / XLP ratio today, it is approaching an important 5 year high around 1.23 (ratio currently around 1.207):
The outperformance of health care over the last year has been very strong, and might be due for a pause. As the ratio approaches its 5 year highs though, the next 6 months could be quite telling on whether health care becomes the new “safe” leader, while consumer staples loses its luster.