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Are Traders Locking In Gains in Costco and Colgate-Palmolive?

Profit-taking in consumer staples stocks could anticipate broader selling in the sector

by 3/19/2012 8:15:34 AM
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Within days of climbing to new 52-week highs, shares of the Consumer Staples Select Sector SPDR ETF (XLP) are trading lower for two out of the past three sessions, and are technically oversold for the first time since the beginning of the month.

The oversold conditions in XLP have only begun to be fully realized in some of the major staples stocks, a number of which were trading at significant highs only a few days ago. Some of the stocks leading the XLP lower on Friday include Procter & Gamble (PG), one of the ETF's larger holdings, which closed down for a third day in a row on Friday to finish just outside of technically oversold territory.

Also pulling back from recent highs are shares of Costco Wholesale Corporation (COST). COST sold off by more than 1% in Friday's session as traders began to lock in gains from a rally that saw the stock finish higher for 13 out of 14 days heading into Friday's open.

COST is trading in neutral territory and closer to recent highs than lows. Additional profit-taking will be key to providing the market with the lower price levels that have traditionally attracted buyers. That said, shares of COST have not pulled back to technically oversold levels since climbing out of bear-market territory back in the middle of January.

A consumer staples' consumer staple, Colgate-Palmolive (CL) broke out of a two and a half week trading range to advance to its highest level in more than a year. Traders and more active investors have begun to take profits, sending the stock lower for two out of the last three sessions.

It will take more than a little profit-taking to return Colgate to technically oversold territory (CL was last in technically oversold territory in late January.) But if the selling in stocks like Colgate-Palmolive -- and in Estee Lauder (EL) and Costco Wholesale, as well -- is at all indicative of what is going on in the broader consumer staples sector, then the possibility of "piling on" on the sell side could create the kind of short-term weakness from which oversold rallies are often born.

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David Penn is Editor in Chief of TradingMarkets.com

Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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