No Market For Defensive Stocks

With the stock market continuing to have an upward bias, those few markets that have become especially undervalued tend to stick out. And while both utilities and consumer staples have underperformed as sectors in recent days, the common denominator may be something as simple as dividends and the art of playing defense.

I considered writing this column yesterday, noticing the persistently high ratings for the Utilities Select Sector SPDRS ETF (NYSE: XLU) and the Consumer Staples Select Sector SPDRS ETF (NYSE: XLP). Both ETFs have earned “consider buying” ratings of 8 or higher over the past few sessions.

It wasn’t until the upgrades in exchange-traded funds like the First Trust Morningstar Dividend Leaders Index Fund ETF (NYSE: FDL) and the PowerShares Dividend Achievers Portfolio ETF (NYSE PFM) that the evidence that the sellers were out in force against all things dividend-paying and defensive seemed to be overwhelming.

Both FDL and PFM are exchange-traded funds that consist of dividend paying stocks like telecommunications, pharmaceuticals and food stocks. Five of the top 10 holdings in FDL, for example, are major drug manufacturers. And while its top 10 is a little more diverse, PFM also has more than a quarter of its holdings in “consumer defensive” sectors and industries, and feature such stocks as Pepsico (NYSE: PEP), Verizon (NYSE: VZ) and Kraft Foods (NYSE: KFT). Note how many of these otherwise dissimilar stocks have performed in the first few weeks of 2012.

It is hard not to notice that while these consumer defensive, dividend-paying stocks are in pullback mode, traders are gorging themselves on financials. This includes a number of bank stocks that have been trading in bear market territory for months. And given that many of these defensive stocks are pulling back after rallying to significant new highs just a few days or weeks ago, it would not be a surprise for any correction in bank shares to benefit some of the more defensive, dividend-paying stocks – and the ETFs that represent them.

Heading into trading on Tuesday, shares of FDL have earned a two-point, “consider buying” upgrade to 10 out of 10, the highest rating possible. Also earning significant upgrades intraday on Friday, PFM is set to begin trading next week with similarly lofty ratings of 9 out of 10.

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David Penn is Editor in Chief of TradingMarkets.com