Consumer Staples Are About to Get “Crunched”

Equities are recovering after opening lower this morning. Following a two-day slide, bulls seem ready to fight back.

Even if that means buying amid more dismal unemployment data.

Bank stocks, in particular, are having a good day. Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) lead the pack, rising 2.70% and 6.8%, respectively, amid a “zig-zag” trading session that initially saw the indexes drop.

The Labor Department reported over 2.9 million new jobless claims for the week ending May 9th – a statistic that, while not necessarily surprising, certainly isn’t good. Economists polled by Dow Jones expected only 2.7 new unemployment fillings.

Now, over 36.5 million Americans are unemployed as a result of the COVID-19 pandemic. In April, 20.5 million were without jobs.

The mountain of poor economic data is only growing larger. That doesn’t mean it’ll get much worse, though. Especially now that states are starting to reopen.

But it does suggest that the U.S. economy has a steep hill to climb to get back to pre-coronavirus numbers.

For the market leaders, however, the rich stand to only get richer.

“Those stocks that were doing well before all this are the ones that did well [during the rally],” Aaron Clark, portfolio manager at GW&K Investment Management, said.

“It’s like the big get bigger and stronger.”

Investors looking for “value plays” might have a hard time finding them as a result.

“Nobody’s ever been through anything like this,” Clark added.

“For now, we’re just hoping we’re finding the right businesses that can continue to grow and take share and come out stronger.”

Still, many sectors occupy precarious positions. Banks are rising this morning but that doesn’t mean they’re anywhere close to being “out of the woods.”

Not by a longshot.

And other sectors – those that tend to do well during times of economic strife – are facing significant headwinds.

The SPDRs Consumer Staples ETF (NYSE: XLP), which, as the name suggests, tracks the performance of stocks in the consumer staples sector, has been featured here before.

We took a look at how the ETF was doing a few weeks ago, right after it broke through key support on May 1st (the upper yellow line).

Today, XLP broke support – the low set last week (the lower yellow trendline) – again. With little in the way to prevent its collapse, consumer staples could be in for a world of hurt.

Regardless of whether the economy comes roaring back or not.

Bulls went hog-wild on consumer staples following the COVID-19 bottom. No matter how you slice it, the sector still looks overvalued.

Today’s breakthrough past support for a second time may have confirmed it.

Moving forward, the market seems ready to go any which way. A vaccine revelation could lift share prices in a hurry. Alternatively, if the reopenings stumble, share prices could just as easily sink even further.

Finding the “low hanging fruit”, A.K.A. sectors (or stocks) that are either under or overvalued, will be important for traders over the next few weeks.

Despite its typically resilient nature, the consumer staples sector could be one of them.


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