Sector Drill-Down: One Surprising Poor Performer

Posted by jbrumley on November 25, 2020 9:44 PM

Given the market's recent foray into record high territory, it would be easy to presume every sector's and every industry's stocks are at least making some sort of forward progress. That presumption would be wrong, however. Amazingly enough (and despite the demand created by the coronavirus contagion), household products stocks are struggling. After a runup through August, they've been strangely vulnerable to pullbacks. As of Wednesday, these names are back to where they were in late August. The S&P 500 is up nearly 7% for the same timeframe. Perhaps worse, household products stocks started to wave a big red flag this week.

The daily chart of household product stocks paints a simple enough picture. These names broke under their 20-day and 50-day moving average line on Monday, finally dragging the 20-day line under the 50-day line. This is the first time we've seen this since March. A close look at the chart suggests, in fact, that these names are finding technical resistance at these now-converged moving average lines.

You can thank Clorox (CLX) for most of this weakness. While the company couldn't make enough of its product in the height of the pandemic's early panic, investors have been wading out of that strategic trade since August... easing out pretty indiscriminately. This particular name broke back under its 200-day moving average line this week. The second time we see this sort of action, the sellers are pretty serious. You'll also notice that Clorox shares seemed to find a technical ceiling at their key moving average lines each time the bulls did try to stage a rebound since September. That's a hint that more than a handful of people have their finger on the "sell" button, and that the buying conviction was never that great to begin with. Go figure.

Church & Dwight (CHD) - the company behind Arm & Hammer, Oxi-Clean, Xtra laundry detergent, and Kaboom multi-purpose cleaner - is helping send the group lower as well.

Procter & Gamble (PG) isn't exactly lending a helping hand either.

These three names are the biggest in the business, so their weakness alone is enough to do overall damage to the industry index.

It would be easy to chalk up the recent weakness to the idea that these names were the makers of the cleaning products consumers just couldn't get enough of. Now that this demand is leveling off, all these bulls may be starting to look around and realize we've rallied too far, too fast.

That's not really how things have taken shape though. This sector index gained around 47% from March's low to October's high, which is respectable, but not market-beating. There's only so much product these companies would need to make even when demand is through the roof. They each hit their max potential, in terms of revenue. But, it was only strong by consumer goods standards. Traders may have been expecting a miracle that not only didn't fully pan out, but didn't persist. Now that reality is setting in, enthusiasm is waning. These stocks are just reflecting that change.

It's not too late for the group to recover. As much damage as Clorox, P&G, and Church & Dwight may have done, their extensive selloffs have them at levels that could fuel a rebound. They may get one more chance to start one before frustrated investors throw in the towel. Distribution of the recently-confirmed COVID-19 vaccines will work against this possibility. [If there's a "cure," then there's no need to be clean-conscious.]

To this end, if our proprietary household products index breaks below its 100-day moving average line (gray) currently at 862 and/or the recent lows around 852 (blue, dashed), then these names may be too far gone to salvage anytime soon.