It’s no secret: I expect the stock market to rally in the second half of the year.

In fact, I have said the S&P 500 could rally double-digits from here.

Well, today, I want to let you know which sector is the one you want to own.

This is important because we’re not going to see a straight shot higher — this is going to be a volatile second half of the year.

But amidst this volatility there’s one sector that will stand out amongst the others.

It has been unloved since the start of the year. It sold off along with the rest of the stock market during the latest correction, but it is the one sector that has failed to bounce back at all.

That’s about to change. Here’s why…

A Steady Group of Stocks 

The consumer staples sector isn’t one we generally think of as being unloved. It’s typically a steady group of stocks that go back as much as a century in their respective fields.

Stocks like The Procter & Gamble Co. (NYSE: PG), The Coca-Cola Co. (NYSE: KO) and Walmart Inc. (NYSE: WMT).

These stocks also tend to follow the market, at the very least.

But since the latest stock market correction, it’s a sector that has failed to recover, and is actually down more than it was during the correction.

That represents an opportunity when you understand one simple concept about the major sectors of the market — there is always a rotation.

It’s a concept I have talked about before, and have been studying for years now.

Over and over again, one thing is certain: Stocks rotate around the S&P 500 Index in a predictable fashion.

The Relative Rotation Graph™

The graphical representation is in the Relative Rotation Graph™ (RRG) concept. I’ll keep it brief today, but if you want to read more, click here.

Basically, it looks at the relative performance of a stock or sector compared to the S&P 500, and adds a momentum indicator to that. This shows that stocks or sectors rotate in a predictable fashion of moving from lagging the S&P 500, to improving, then leading, and eventually weakening again to fall back to lagging — and then do it all over again.

This is the rotation that occurs in the stock market.

Consumer Staples Sector

And right now, the consumer staples sector has drifted a significant distance from the center, which represents the S&P 500. Take a look:

We can confirm this lagging segment for the sector by looking at a price chart of the sector itself. You’ll see it hasn’t participated in the rally the broader stock market has in the past couple of weeks.

In fact, the sector is still down over 15% from the peak in January. The S&P 500 is down just 4%.

This is why the sector has drifted so far away from the center in the RRG, and it’s why the sector is set to rally as much as 20% from now till the end of the year.

An Extremely Rare Occurrence

Looking at the RRG, the last time the consumer staples sector was this deep into the lagging quadrant was at the start of 2017 — the sector popped 10% over the next six months.

It hasn’t been there again in the last decade.

So it’s an extremely rare occurrence to see this much deviation between a usually stable sector and the broad market. And if history is any indication, we can expect the sector to see a big rally over the next six months.

I’m looking for a 20% rally as the sector makes its way back to its highs prior to the stock market correction — a very attainable level.

Playing the Rally

There are a few ways to play the rally.

You can pick a few stocks from the sector to outperform, which could see greater than 20% gains. Some examples include Procter & Gamble, Coca-Cola and Walmart, which I mentioned earlier in this article.

You can also grab a call option on those stocks, or the sector itself.

Today, I’ll recommend grabbing a cheap call option on the sector.

You can go with the Consumer Staples Select Sector SPDR ETF (NYSE: XLP) January 18, 2019 $50 call option for around $2.25.

If the exchange-traded fund matches my 20% rally over the next six months, that would send the option up more than 300%!

Regards,

Chad Shoop, CMT

Growth stocks continue to outperform value stocks and have been doing so for such a long time that this analyst believes we’ve reached a point where a switch where value stocks will lead with growth stocks behind and declining – R. Zurrer for Money Talks

Back in the late 1990s I interviewed for an analyst job with a value-oriented money manager. My main impression of our talk was how sad the guy was. The tech bubble was in full swing, any little nothing company with even a tangential relationship to the Internet was soaring, and this poor guy’s cash-rich, super-safe stocks were lagging so far behind the market averages that it was hard to see how he kept a single client. 

Fast forward to today, and his value investing successors are in that same boat, underperforming their tech stock counterparts day after day and wondering how to keep from sinking without a trace. From today’s Wall Street Journal: 

Value Investors Face Existential Crisis After Long Market Rally

Hunting for cheap stocks has been out of favor for so long that some self-proclaimed “value” investors are embracing a broader mandate, a potentially costly move in the later stages of an economic cycle.

Many such buyers have drifted away from the hallmark of value investing championed by the likes of Benjamin Graham and Warren Buffett : actively picking stocks the market has overlooked. Those legendary investors assessed what they called a company’s intrinsic value and compared it with metrics such as its cash flow and price-to-book ratio, a measure of net worth.

Value stocks—traditionally shares of consumer-staples companies, basic materials firms and big manufacturers, among others—have been stuck in a rut for most of the nine-year rally in U.S. stocks. The Russell index of 1,000 of the biggest value stocks in the market has fallen 2.1% in 2018, the fifth straight year—and the 10th of the past 11 years—that the index has lagged behind its growth counterpart, which is up 6.9%.

Some critics say the measures used to identify value have aged poorly in a market dominated by passive investing strategies and asset-light technology companies. Those trends have pushed more investors into the shares of fast-growing companies such as Apple and Netflix that have powered the market higher in recent years. Other investors have turned to studying momentum trading, crowded positions, fund flows and event-driven trading, strategies not typically associated with value investing.

“One of the toughest things is being able to articulate what value investing is anymore,” said Laton Spahr, the portfolio manager of Oppenheimer’s value fund. “It’s hard to pinpoint what value investing is today, and that is the hard thing to making it relevant to retail clients again.”

Many investors say they aren’t looking back, even as most analysts generally agree the U.S. is in the later stages of an economic cycle. That would suggest stocks are due for a pullback, putting investors who have altered their strategies at risk of missing out if the pendulum swings back in favor of traditional value stocks that historically shine when the broader market is under pressure.

Perhaps one of the more controversial changes among value investors is the drift toward growth companies. Value investors who justify buying shares of Amazon.com or Netflix, for example, say it is because those companies are still undervalued by the broader market, despite their big revenue growth. Others call it portfolio window-dressing to boost returns.

Eddie Perkin, chief equity investment officer at Eaton Vance , said value funds that have ignored the hugely popular FANG stocks—Facebook, Amazon, Netflix and Google parent Alphabet Inc. —run the risk of being left behind in the market.

“The FANG stocks are so dominant in those benchmarks that to not own them, you got really hurt the last few years,” he said. So you had to have those in your portfolio to keep up with other growth managers.”

Eaton Vance’s Large-Cap Value Fund, which has been in existence for more than 80 years, is tilted toward financial stocks such as JPMorgan Chase but also counts a position in Alphabet.

If this sounds familiar, it’s because late-cycle markets frequently end with hot money chasing what’s been going up, widening the gap between growth and value and forcing value managers to choose between extinction via customer redemptions or adaptation (buying growth stocks or otherwise embracing greater risk) – at exactly the time that their original strategies are set to pay off big-time. 

Post-bubble crashes always favor value over growth. Unfortunately, only a relative handful of value managers are still there to enjoy the vindication. 

Martin Armstrong forecast the current flood of money from foreign countries into the US Stock Market 28 years ago on Michael Campbell’s Equity Magazine (Martin’s posting to follow):

Now here is today’s post “The Rise in US Share Market in Foreign Currencies” – R. Zurrer for Money Talks

COMMENT: I spoke this “pretend” analyst who use to be a goldbug and is now a cryptobug. Boy does he hate you. I really had to laugh for he said your computer is a fraud and your forecast on the euro was only correct because you organized it with central banks. I asked him who writes more than 500 reports on every market around the world each and every day? He said you did with staff. I asked him, how many people would it take to do that? He had no answer.

I probably would have lost an equal amount in BitCoin buying it at the high based on his emails. Thank you for opening my eyes to see everything globally. It really has helped.

GHH

REPLY: I know. I use to get real hate mail from the goldbugs. Now it is the crypto people. They really get all worked up all the time about this new technology and that how a central ledger will overtake the world. They seem to have forgotten it took 100 years for the Fax Machine to become practical. They are desperate to preach their theories because they are trying to convince the world they are right so they can make a fortune. They are like the people they hate. They are trying to manipulate the world to be as they desire rather than observing how does the world actually work.

Here is the S&P500 expressed in various currencies (click on image). This simple illustration shows how the world really functions. You will note that the S&P 500 is consolidating in US$ terms, but it is starting to breakout and make all time new highs in various currencies like the Euro. This is what I mean that each and every person will act according to their own self-interest. That is Smith’s invisible hand. The crypto advocates

are actually cheering a one-world currency. They cannot understand that the Euro is failing because centralized planning fails. Their distributed ledger requires taking political power away from governments and installing a one-world economy where we all use the same cryptocurrency. They are blind to the simple reality that we do not have that much time left. We will still crash and burn BEFORE any reform can take place. Nobody fixes anything until it breaks. Sorry – that’s human nature. We don’t have decades here.

I really do not need this nonsense. I could care less what they say or do. They are an irrelevant distraction. Nothing will prevent the collapse of the monetary system. They cannot see that. It’s not my job to convince them of anything. Let them go down with their theories. I promised I would not leave anyone behind. That does not mean I must convert these type of people who will never listen. Nevertheless, we do not do ANYadvertising and prefer to keep the individual readership small. Our bread & butter is institutions. If it was up to me, I would retire. But you see, there is no real future for we will have a choice. We move to a totalitarian state where the government will take even more power, or we move toward the light of reform and freedom. I do what I do for my posterity. That is my self-interest.

Institutions, on the other hand, prefer I do no interviews with mainstream media and to shun advertising. Naturally, they do not want to see millions of followers. Everyone wants an edge. It is a difficult road to follow through the raindrops. This is the cards we have been dealt. We just have to play them out. The crypto people would not be so nasty toward me if they were secure in what they believe. They know they have to sell their idea and convince an entire world. That is a tall order.

Less than 5% of the money is really physical. The bulk is already electronic entries. Things are changing and ONLY AFTER the crash and burn is there an opportunity for reform. But make no mistake about it, if we crash, but do not burn, then the government will gladly take them up on electronic currency so they can monitor and tax everyone on everything. Their dream is to eliminate cash. They argue it would also end crime and deficits because every querter you find on the groud they will now get their 50%+.

 After an exceptional 2017 showing a 31% return, in 2018 Stephen Todd remarkably missed the big Stock decline in January and currently has a positve return on the year with 3 profitable out of 5 trades – R. Zurrer for Money Talks

For Tuesday May 29, 2018 – 3:00 PST

DOW – 392 on 507 net declines

NASDAQ COMP – 37 on 732 net declines

SHORT TERM TREND Bullish

INTERMEDIATE TERM Bullish

STOCKS: On Friday, I predicted that the next couple of days should be up unless some sort of geopolitical event comes out of left field. Well, that’s exactly what happened. There was a political crisis in Italy and this spread fear of multiple exits from the euro currency. 

And if that weren’t enough. the prospect of a China, U.S. trade conflict raised its ugly head again. 

Then there were interest rates which dropped sharply. Lower rates hurt the banks. Hey wait. Weren’t we concerned about rates being too high a few weeks ago? That’s why we have to look at the charts. They tend to summarize the diverse inputs.

GOLD: Gold was up $2 You would think that with all the uncertainty, and a big drop in interest rates, that gold would have done better. Of course, the dollar kept surging and that kept a lid on the yellow metal. 

CHART: Just looking at the chart without the indicator, it looks negative. we’ve seen some support lines broken. However, we are not oversold as measured by 5 day RSI (arrow). An oversold RSI has a pretty good record for predicting rebounds.

BOTTOM LINE: (Trading)

Our intermediate term system is on a buy.

System 7 We are long the SSO from 112.24. We should turn it around on Wednesday, but if the S&P 500 is lower with 5 minutes left in the session, sell at the close. 

System 9 Neutral. 

System 10 – Gold We are in cash. Stay there for now. 

NEWS AND FUNDAMENTALS: Durable goods orders lost 1.7%, worse than the expected loss of 1.2%. Consumer sentiment was 98, lower than last month’s 98.8. On Tuesday we get the Case Shiller home price index and consumer confidence. 

INTERESTING STUFF : Justice will not come to Athens until those who are not injured are as indignant as those who are injured. —–Thucydides

TORONTO EXCHANGE:Toronto lost 94. 

BONDS: Bonds had another sharp rise. 

THE REST: The dollar surged to another new high. Crude oil got hit yet again. Crude is quite oversold.

Bonds –Bullish as of May 21. 

U.S. dollar – Bullish as of May 15.

Euro — Bearish as of May 15.

Gold —-Bullish as of May 24.

Silver—- Bullish as of May 10.

Crude oil —-Bearish as of May 24.

Toronto Stock Exchange—-Bullish as of Feb. 12.

We are on a long term buy signal for the markets of the U.S., Canada, Britain, Germany and France.

Monetary conditions (+2 means the Fed is actively dropping rates; +1 means a bias toward easing. 0 means neutral, -1 means a bias toward tightening, -2 means actively raising rates). RSI (30 or below is oversold, 80 or above is overbought). McClellan Oscillator ( minus 100 is oversold. Plus 100 is overbought). Composite Gauge (5 or below is negative, 13 or above is positive). Composite Gauge five day m.a. (8.0 or below is overbought. 12.0 or above is oversold). CBOE Put Call Ratio ( .80 or below is a negative. 1.00 or above is a positive). Volatility Index, VIX (low teens bearish, high twenties bullish), VIX % single day change. + 5 or greater bullish. -5 or less, bearish. VIX % change 5 day m.a. +3.0 or above bullish, -3.0 or below, bearish. Advances minus declines three day m.a.( +500 is bearish. – 500 is bullish). Supply Demand 5 day m.a. (.45 or below is a positive. .80 or above is a negative). Trading Index (TRIN) 1.40 or above bullish. No level for bearish. 

  No guarantees are made. Traders can and do lose money. The publisher may take positions in recommended securities.

General Electric (NYSE:GE) shed about $10 billion in market cap Wednesday, in what amounted to being its worst trading day percentage-wise since the height of the financial crisis in early 2009. The industrial conglomerate’s shares cratered by about 7.4% as CEO John Flannery spoke at an annual Electrical Products Group conference in Florida… Click for the complete article