A Second Look at the Sell-Off in Safety Stocks

Closing lower for five out of the past six trading days, the ^XLP^ continues to pullback from its multi-month highs set just a few weeks ago. But the question for traders is whether or not the pullback in the leading consumer staples ETF means that traders and investors are abandoning the group for more risky markets, or simply taking profits from the ETF’s latest run to new highs.

The correction in XLP comes in the wake of the ETF’s last rally from oversold lows, which took XLP briefly into bear market territory in late November. Two out of three oversold finishes during that Thanksgiving week pullback were enough to send XLP higher for the next four days in a row, gaining more than 5%.

XLP is among the higher rated exchange-traded funds heading into Tuesday’s session, earning a “consider buying” rating of 8 out of 10 midway through trading on Monday. Should the fund remain under the influence of sellers, then even lower prices – and potentially higher ratings – could develop in XLP before midweek.

The sell-off in safety stocks has meant different things to different stocks. For stocks trading above their 200-day moving average like ^CVS^, the current pullback in the sector potentially represents an opportunity for traders looking to buy weakness in uptrending markets.

Shares of CVS have closed lower for four out of the past six trading days, and dropped by more than 2% in Monday’s trading. Despite the selling, CVS has not yet finished in oversold territory and takes a neutral rating of 6 out of 10 into trading on Tuesday.

On the other hand, stocks like ^TAP^ had been increasingly overbought below the 200-day moving average. And the Monday selling meant in all likelihood sellers and short-sellers taking advantage of the fact that the stock, which has been trading in bear market territory since early May, had rallied to its highest level in more than a month, becoming overbought in the process.

Other consumer staples stocks that have begun to pullback above their 200-day moving averages include ^TSN^ and ^CAG^. Both stocks earned ratings of 6 out of 10 midway through Monday’s session and, though down two in a row, have yet to pullback into oversold territory.

The ETFs and stocks in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com