The food and beverage sector is often regarded by investors as less risky than other sectors because of the nature of the underlying businesses. While it is true that people still need to buy food and related items regardless of the state of the economy, when consumers start to feel uncertain about the future, they often change their spending and look to save money wherever possible.
Shifting spending patterns can and do affect the profitability of companies across the food and beverage sector. Based on the patterns shown in the charts below, it appears as though spending patterns of consumers are in the process of changing, and as a result, food and beverage stocks could be headed lower over the weeks or months to come.
Invesco Dynamic Food & Beverage ETF (PBJ)
Investors who want to get a sense of the overall direction of a niche sector such as food and beverages often turn to exchange-traded products such as the Invesco Dynamic Food & Beverage ETF (PBJ). As you can see from the chart below, the price of the fund has managed to trade above a key long-term level of support shown by the dotted trendline. This chart clearly shows that bullish traders have used the $31.50 level as a guide for determining the placement of buy and stop orders since late 2017, and the recent failed attempt to break above, shown by the blue arrow, suggests that the bulls do not have the conviction to drive prices higher.
The sharp decline that was sparked in December has also triggered a bearish crossover between the 50-day and 200-day moving averages, known as the death cross. This long-term sell signal is often used by traders to mark the beginning of a long-term downtrend, and sell orders could be placed as close to the combined resistance as possible to maximize the risk-to-reward ratio. Stop-loss orders will likely be placed above $32.28 in case of a surprise shift in consumer spending or sentiment.
The Kroger Company (KR)
With nearly 3,000 grocery stores across the United States, The Kroger Company (KR) is one of the best-known food-related companies. The chart for Kroger is currently of specific interest to active traders because a head and shoulders pattern is currently forming, and a future breakdown would likely act as a catalyst for a move lower. Followers of technical analysis look for this pattern because it visually represents the shift between bulls and bears and is quite accurate at identifying key levels for placing orders. A break below the neckline, which in the case of Kroger would be below the psychological $27 level, would likely point to a move toward target prices near $22, which is equal to the entry point minus the height of the pattern.
Sysco Corporation (SYY)
Another food stock that is popular with active traders is Sysco Corporation (SYY). Based on the chart below, it has been trading within a defined uptrend for most of the past couple of years. As discussed above, recent weakness has pushed the price of the stock below the support of its 200-day moving average. The downside momentum that has plagued Sysco for the past few months has also triggered a bearish crossover between its 50-day and 200-day moving averages. Active traders will likely hold a bearish outlook on Sysco and set target prices near the dotted trendline. A move below there would likely act as a catalyst for a continued move lower and some could even set targets close to the July 2017 lows.
The Bottom Line
Food and beverage stocks are often a favorite for long-term investors because they tend to be sheltered from economic headwinds due to the nature of the underlying businesses. However, based on the charts shown above, it appears as though the bears are in control and that prices are headed lower. Bullish traders may want to remain on the sidelines until the patterns start to reverse and key indicators start to point higher again.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.