With staples recently breaking out while discretionary stocks have broken down, is it time to play defense within portfolios?
Markets are always in flux, with strength moving between offensive and defensive areas. Among the most important signs of risk-on versus risk-off movement is the relationship between consumer staples and consumer discretionary stocks. With staples recently breaking out while discretionary stocks break down, is it time to play defense within portfolios?
Consumer Staples were previously one of the market’s biggest laggards, with the State Street Consumer Staples Select Sector SPDR ETF (XLP) falling 1.2% in 2025. However, XLP is now up 12% YTD, outpacing the S&P 500 by 11.4% while setting all-time highs. Prior to 2026, XLP’s best return through February 4th was 5.5%, meaning the group is more than doubling its previous best start. While a rising Staples group could signal some flight to safety, the market has historically performed better after strong starts from staples. Specifically, if XLP is positive through 2/4, SPX averages an 11.7% return the rest of the year, with 100% of previous instances ending higher. Extremely strong starts from XLP, such as 2019 and 2013, were even stronger signals in favor of the market. Meanwhile, XLP generally underperformed SPX and XLY following those starts, which is positive for risk-on areas.
Looking at the sector on a relative basis, staples have shined even brighter recently. XLP regained near-term strength on its relative strength chart versus the State Street Consumer Discretionary Select Sector SPDR ETF (XLY). It hasn’t just been the largest companies driving the movement either. Consumer Staples have demonstrated strength on an equally weighted basis, with the Invesco S&P Equal Weight Consumer Staples ETF (RSPS) seeing notable technical improvement. The fund just moved to a positive trend and completed a buy signal for the first time since 2022. Additionally, it earned near-term strength versus the Invesco S&P Equal Weight Consumer Discretionary ETF (RSPD). Periods where staples showed long-term strength over discretionary, such as 2007 – 2009 and 2022, coincided with considerable weakness. While RSPD and XLY maintain long-term strength versus staples for now, further movement would be extremely notable, making the two RS charts worth monitoring closely in the coming months.
Recent moves towards staples have been notable not only for the magnitude of outperformance but also the speed at which they did so. There have been 19 other instances in which XLP has outperformed XLY by 10% or more over a month. The returns for both ETFs following those instances were muted, with XLP averaging a one-year gain of only 0.75% while XLY wasn’t much better at 3.57%. However, our current market still favors discretionary for the time being, as XLY holds a 4.63 fund score that is 1.57 points higher than that of XLP— a clear distinction from environments like 2007/2008. When XLY demonstrated a higher fund score than XLP despite a month of underperformance, XLY averaged a more robust one-year return of 9.29%.
The recent flight to staples has been noteworthy, but the long-term picture for domestic equities and risk-on areas like consumer discretionary remains more positive than not, especially relative to defensive groups. Staples still hold the bottom of DALI’s sectors rankings while Domestic Equities are tied with International Equities in first place. Additionally, staples are heavily overextended, as XLP’s current 160% overbought reading is the highest in its 26-year history. Consequently, staples remain more of an area to monitor, particularly if things continue moving to the downside.
