I haven’t stepped foot in a grocery store in at least 15 years.
Like many men my age, food somehow just magically appears in my home…
Of course, my wife would tell you magic has nothing to do with it. Thanks to her, I have a stocked pantry and a full fridge.
But recently, she also brought home a trade idea…
See, my wife has noticed emptier shelves, higher prices, and smaller quantities at the store lately. (That last part is nothing new. For years, I’ve seen manufacturers get away with putting less and less product in each package. Some well-known cookie companies even add cardboard to their packages to fool consumers.)
As for the empty shelves and higher prices, there’s no doubt as to the culprit…
The Wall Street Journal explained in a recent article that soaring inflation is changing the way some consumers shop.
But even more interesting… If we learn to read between the lines, this change is handing us a subtle, low-risk, potentially high-reward trade.
Consumers Are Passing on Name-Brand
Analysts say that consumer staples — necessities like laundry soap and food — are recession-proof. They argue that since we need these products, the companies that make them should do well in any environment. So, they tend to recommend companies that make brand-name consumer staples like Tyson Foods (TSN), Procter and Gamble (PG), and Kellogg’s (K).
But this isn’t proving to be the best advice.
Consumers are still buying these staples, but many are turning to lower-priced store brands.
One anecdote in the Journal explains the trend:
Ms. Philips, with four children ages 6 to 18, replaced ornamental plants with vegetable seeds in her backyard garden, started shopping at discount grocer Aldi, and last week ditched her $7-a-bottle Tide detergent for a similarly sized bottle of Purex she found for $2.50 at a Dollar General.
“It doesn’t smell as nice,” she said of the detergent. “But I’m more concerned with feeding my family.”
Some might read this, shake their fist at inflation, and move on with their day.
But great traders know how to observe these trends early, and set themselves up to profit.
Here’s how I used this story to find a promising trade setup…
The Generic Staples Trade, Start to Finish
I knew from the article that generic brands should benefit from this change in consumer habits. With a simple Google search for “generic grocery product makers,” I found a list of companies.
Only one, TreeHouse Foods, Inc. (THS), was a large, publicly traded company.
Now that we have THS, we can shift from the fundamental idea to the technicals of the trade.
To start my analysis, I used a Relative Rotation Graph (RRG) to compare the price action in THS to The Procter & Gamble Company (PG), a brand-name consumer staples company.
Both stocks are set to enter the improving (blue) quadrant, indicating they could be at the beginning of uptrends.
But you’ll notice that THS is to the left of PG on the chart. This means it’s a much more volatile stock — and is more likely to make a big move quickly.
Now that I know the stock is positioned for an uptrend, I can continue my analysis of THS. The next chart shows the stock with a simple stochastics indicator.
In 2017, THS broke down from a massive head-and-shoulders pattern highlighted in the rectangle.
This chart pattern is formed as an uptrend ends.
In an uptrend there are a series of higher highs, leading to a peak as seen in the chart. The pattern is completed when prices fail to make a new high and break below support (the level where previous pullbacks had ended).
To find a price target for the pattern, just apply the principle of symmetry by measuring the depth of the pattern.
If you take the same depth from the top to the bottom of the pattern, you get a range of about $35.
If we apply that same depth to start just below the pattern, you get a price target of $30.
THS just recently came close to that level. So close, that we can confidently say the downside price target has been reached.
Lastly, at the bottom of the chart is the stochastics indicator. Stochastics reached an oversold level (below 20) and reversed, giving a buy signal.
News about changing consumer habits provided us a reason to consider this trade — but our technical analysis provided us a reason to actually enter it:
Relative strength on the RRG verified that THS could make larger, faster moves than a name-brand manufacturer.
The head-and-shoulders price pattern shows the downtrend should be over.
Momentum, shown with the stochastics indicator, is bullish.
This is an example of how you can apply technical analysis as a discretionary trader. Read the news, find a company, compare it to an alternative, and buy if momentum is bullish.
To trade THS, you could buy share of the stock or buy a call option dated out six months or so.
Michael Carr, CMT, CFTe
Editor, One Trade
Chart of the Day:
Consumer Staples Set to Dive?
By Mike Merson, Managing Editor, True Options Masters
I got curious after reading Mike’s piece today — how’s the whole consumer staples sector doing, in general?
The answer surprised me. The iShares U.S. Consumer Staples ETF (IYK) is just over 1% off its all-time high. It emerged from the recent volatility like a champ.
On a short-term basis, though, I think we’re likely to see IYK dip.
The momentum indicators on the daily chart are cooling off, even as ILK rallied to its almost-all-time high. I also plugged in the Stochastic RSI, and we can see that it’s about to turn down from an overbought level.
You’ll probably get a better chance to buy staples stocks in the next week or two. Though I will add, TreeHouse Foods is not part of IYK. It could break from the pack, bolstered by a more frugal consumer.
Managing Editor, True Options Masters