Consumer Staples Foreshadowing a Correction?

“Beware the ides of March.” - William Shakespeare

Markets have had a big run so far in 2012, and I believe there is much more room to go given my analysis that suggests that the environment resembles that of 2003 and 2009 for risk assets, whereby reflation is setting in thanks to global central bank paranoia over a 2008 repeat.

I even made the case on CNBC that stocks could rise by over 40% this year, in a segment which can be viewed here. It is entirely possible for markets to correct within the broader bull move I think can persist this year, and the period of strength in defensive sectors does seem to be foreshadowing that.

Take a look below at the price ratio of the Consumer Staples Select Sector SPDR ETF (XLP) relative to the Dow Jones Industrial Average ETF (DIA). As a reminder, a rising price ratio means the numerator/XLP is outperforming (up more/down less) the denominator/DIA.

When Consumer Staples outperform the Dow, its generally because of investor fear over the economy and potential stock market volatility. After all, the Consumer Staples sector is less sensitive to economic growth, and tends to gyrate less than broader stock market averages. Consumer Staples outperformed substantially last year as the deflation pulse was beating, and fell off during the Fall Melt-Up around the October low. Notice the far right of the chart, where strength appears to have returned. While I do not suspect the trend to persist for long, it does seem to suggest a possibility of a mini-correction to come. For bull markets, that's a healthy thing as it would likely allow for more traders and investors to rush in at slightly lower prices.

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