Watch For The Rotation Into Consumer Staple Stocks

By Joey Fundora | May 18, 2011 AAA

Recently, there has been a subtle rotation into consumer staple stocks as the markets have encountered selling the past few weeks. Beyond this, large cap stocks have also been outperforming sectors such as small caps and technology. This is typical behavior for periods of weakness as money rotates to the safer sectors. Safer typically means lower volatility and a larger dividend. While I am of the opinion that the markets have not topped yet and could have more upside, it is not a bad idea to have some of these staple stocks on your watch list for the summer trading season, which is often a period of underperformance.
One staple stock that has been performing quite well over the past year is Coca-Cola (NYSE:KO). KO had been consolidating gains from late last year into 2011, until breaking out in late March. It has since settled into a base-on-base consolidation, holding above the breakout area near $65.75. KO has shown very little weakness throughout the past few weeks and is worth watching as a possible trading vehicle during the summer. (For more, see A Guide To Investing In Consumer Staples.)

Source: StockCharts.com



Fortune Brands (NYSE:FO) is another consumer goods stock that has shown relative strength recently. It also cleared a base late in March, and has held above it since then. It has been trading in a tight range near $64 and its 50-day moving average is rising toward its current price. Traders should monitor the $62 area on any weakness as a possible support level, but it looks like FO is already starting to drift higher.

Source: StockCharts.com



Mattel (NasdaqGS:MAT) is another stock already above its prior base. The popular toy maker didn't clear its base until mid-April, and then gave up a huge portion of its post-gap gains that same day. However, it has since settled into a tight trading range while holding above the breakout level near $26. While one more dip to test the breakout can't be ruled out, MAT has held up very well in light of the recent market weakness and should be watched on any strength above $27. (For more, see Channeling: Charting A Path To Success.)

Source: StockCharts.com



Another consumer goods stock that hasn't broken out yet but remains worth watching is Movado Group (NYSE:MOV). MOV did clear a trading range it was following within the larger overall base on a large gap in April and has held near its highs since then. The lows set in the recent pullback in May near $15.50 are the area to watch on any weakness, but the real key is to watch for a close above $17, which could lead to much higher prices.

Source: StockCharts.com



The Bottom Line
While there are no guarantees that the markets will continue to see a full rotation into consumer staples, the stocks mentioned above have held up very well in light of the recent market weakness. If the markets do continue to see weakness, it's possible this group will remain more stable than other, more risky sectors. Many institutions, in particular mutual funds, must remain invested at a certain percentage, and they will continue to rotate to safety if the markets suffer any extended periods of volatility. Sure, they likely won't perform as well during more aggressive periods in the markets, but traders should keep these stocks on their radar in case the environment continues to weaken into the summer. (For more, see 5 Undervalued Consumer Staple Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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