Consumer Staples Are ‘Greatest Opportunity to Short on Wall Street’

• The “bubble is about to burst” in consumer staples stocks, says veteran market technician Jeff Bierman. 
• The sector outperformed the S&P 500 last year but now it’s “overbought and overpriced”.
• “The greatest opportunity to short on Wall Street, according to risk/reward, is consumer staples,” Bierman said. 

Investors sought refuge in consumer staples stocks last year as the broader equity market sank into bear territory, but that group is now in a bubble that’s on the verge of popping, says one veteran chart technician. 

“The greatest opportunity to short on Wall Street, according to risk/reward, is consumer staples. This is the beginning of the breakdown in consumer staples, for the long term,” Jeff Bierman, chief market technician at TheoTrade, said in a note this week. 

Bierman, who was previously TD Ameritrade’s chief technical analyst, was taking a look at the S&P 500 Consumer Staples Sector SPDR Fund. The exchange-traded fund tracks 33 stocks in the sector. It had total net assets of more than $17 billion and Procter & Gamble, whose household brands include Tide and Crest, has the heaviest weighting. 

It also houses PepsiCo and Campbell Soup and Coca-Cola, which Bierman highlighted in his note. 

The ETF fell by 0.8% in 2022, significantly outperforming the 19% slide in the S&P 500.  

But now the defensive consumer staples sector is “overbought and overpriced,” Bierman said.

“Every sector of the S&P [500] needs to come to a single-digit multiple before it signals a market bottom. Semiconductors, oil, and retail (in certain parts) are there. Consumer staples – not even close,” he said. 

Bierman noted Coca-Cola was trading at a 26 multiple when it’s growing at 6% earnings and 2% revenue. Yet its return on assets–a growth-rate proxy–was 12.

“It’s a bubble. This stock can … be cut in half before it’s attractive,” he said of the beverage giant.  

Marubozo

The consumer staples sector—focused on goods and services used for people’s everyday needs—served as a haven when the US equities sharply dropped last year, largely as red-hot inflation prompted the Federal Reserve to kick up interest rates from zero percent. 

Now, the “bubble is about to burst,” Bierman said about the staples group.  “The signal? The biggest Marubozo … in the XLP we’ve seen since back in September,” he wrote. 

A Marubozo is a candlestick chart pattern and candlestick charts look at the opening and closing price of a stock on a single day, Bierman explained. 

Marubozo is a long-bodied candlestick with no shadow and is regarded as a strong conviction signal depending on whether the candle’s direction is up or down. The chart pattern gets its name from the Japanese word meaning close-cropped, the technician said. 

“We’re heading into a recession and consumer staples are priced like growth stocks when they’re actually value stocks,” he said. “The Marubozo signals that we are in for a much deeper correction in consumer staples than we’ve experienced in the past couple of days.” 

A fresh warning of economic contraction coming in 2023 arrived this week from nearly two-thirds of 22 chief economists surveyed by the World Economic Forum. The WEF was hosting the annual elite gathering of business and finance people in Davos, Switzerland.