XLP Leads The Market

Consumer Staples is a traditional defensive sector, so it's hard to believe it could be the leading sector. Nonetheless, this is what I observed.

Whenever there is a divergence between XLP and the S & P 500 Index, the market will move in the direction of XLP eventually. I didn't check whether the same holds for the past years, so maybe this is just for this rally, this year.

Good news to bulls is that the rally may continue, as XLP is in an up trend. The trend line has been tested for quite a few times.

Good news to short term bears is that for every negative divergence (XLP moves down while S & P 500 doesn't), XLP touches the trend line before developing a positive divergence and moving higher. But this time, it didn't touch the trend line yet, leaving some room for bears to speculate.

I couldn't explain this phenomena any better than the following conjecture. XLP is one of the sector ETF's that have the lowest beta. Although not equivalent, beta is related to volatility, and lower beta implies lower volatility. Lower volatility is good in the sense that the price movement will have less overshoot, thus trend lines and other technical tools may work better.

Another sector ETF having the same beta of XLP is XLU (please refer to this post for all the betas). But Utilities is a relative small sector in S & P 500, so it may not affect the market that much.

Health Care is also a traditional defense sector. If you look at the chart of XLV, you may see similar divergences, but there is no such trend line. My explanation for this is that bio-techs, a highly speculative sub-sector, is a part of Health Care, and it may blur the volatility and invalidate the analysis.

Please leave some words here if you have a better theory for this, or if you see any cracks in mine. I'd like to understand this better to know whether we can exploit this in future.