These groups are defensive because they are supposedly less dependent on the current state of the economy. Consumers will likely forego a vacation or a new flat-screen television instead of missing medicine or a meal. Indeed, the Consumer Staples Select Sector SPDR exchange-traded fund did beat the market from June through August as signs mounted that stocks were about to crack (see Chart 1).

Chart 1

SPDR Consumer Staples ETF

This ETF did not resist the market carnage seen last month on an absolute basis, but on a relative basis it came out on top. However, things seem to be changing for the worse. For example, the relative performance chart vs. the Standard & Poor’s 500 has arguably broken its rising trend from June.
 
That suggests sellers are now looking at this ETF with equal or greater gusto than the broader market.
 
Stated differently, the strategy for trying to ride out the market’s downturn by moving into consumer staples looks to be over.
 
And on an absolute basis, the consumer staples ETF is one or two days away from the moving average death-cross signal that got so much coverage in the financial media over the past few weeks. When the 50-day average crosses below the 200-day average, it signals that conditions have deteriorated to such a degree that bearish strategies are warranted going forward.
 
I want to caution that the cross itself is not a sell signal, and numerous naysayers will be quick to point out the track record for selling as the cross happens is not so good. However, it does tell us that the bullish trend is over and the odds of lower prices are much greater.
 
Of course, as with any sector, there are stocks within that look very different. Tobacco, for example, has not broken down below any major supports as the consumer staples ETF and the S&P 500 itself have done.
 
But drug stocks have. So have personal-products stocks such as Kimberly Clark, the maker of Huggies diapers and assorted other health care products. And so have soft-drink stocks such as Coca Cola.
 
All of these are considered to be places of relative safety, but they are not living up to that reputation right now.
 
Utility stocks also outperformed the market from June through August. Though as with other defensive areas, that is no longer the case. A more important condition is the breakdown in absolute terms seen on the long-term chart (see Chart 2).

Chart 2

Dow Jones Utility Average

Last month, the S&P 500 broke down below its trendline drawn from the last correction, in 2011.
 
However, the Dow Jones Utility Average moved below a very solid trendline drawn from the start of the bull market, in March 2009.
 
Needless to say, that is a bearish event.
 
There is one condition that seems to pop up when the stock market is really having problems, and that is increased correlation among sectors. I am not saying that there aren’t any differences among sectors in terms of performance, but there are precious few pockets resisting the overall market weaknesses.
 
Put another way, sellers are becoming less discerning when it comes to raising cash, in the tradition of “throwing out the baby with the bath water.” From a sentiment point of view, that suggests little tolerance for bad news, which is one characteristic of a bear market.