Mmm, Mmm, Not so Good

Mmm, Mmm, Not so Good

May 29, 2018 Off By Chuck

Consumer staples stocks have been the worst performing sector this year (-12%), and Campbell’s Soup stock (CPB) has done nothing to help. Since forming negative divergence and peaking in July of 2016, the stock went on to fall more than 22%, bottoming in October later that year. From that point it went on to rally, albeit a weak one eventually running out of gas in January of 2017, formed a lower high and an ominous rounded topping pattern. Top callers should memorize the look as it is what tops normally look like. From that point it has been downhill as the sellers have been in control pushing its price down more than 45%.

Fast forward to the present and notice how in the weekly chart of CPB below, the most recent low which formed two weeks ago, was done on extremely high volume as shown in the bottom  pane (exhaustion selling?) and stopped right at a prior bottom (support). Notice also how momentum is now oversold and showing positive divergence.  Exactly the opposite of what occurred at the top back in 2016. If one had a very long term investment horizon, they could consider dollar cost averaging into the stock. Typically, when a stock gets decimated like CPB has (think Chipotle, CMG) it can take 12-18 months before it’s safe to enter as a buyer. Why? At that point all the sellers have left the building leaving only buyers and as such the stock can only go one direction, up. During that unwind in sellers, prices typically chop around viciously and will test your patience if you buy early. Forewarned is forearmed.  In the meantime while you wait though, you will be paid fairly well to hold the stock as its dividend yield is now above 4%. I am not a top or bottom caller and as such this interest in CPB is about the small downside risk as compared to the upside potential.