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Taking a step back fundamentally, the grocer market as a whole can really only grow at the rate of the population (a few % per year). This means in order to meet these growth rates, all these new entrants must eventually steal major market share from the majors such as Safeway (NYSE:SWY), Kroger (NYSE:KR), Wal-Mart (NYSE:WMT), and a plethora of other public and private grocers.
Meanwhile, most of these majors have also started offering their own specialty food sections in an attempt to compete with all the new entrants.
Let’s Go to the Tape
Having said all this, for most investors all that should matter is price, and right now price is in an uptrend so longs should stay long, at least for now.
A look at the chart below shows that the trend has certainly been a friend to the specialty grocers and in particular Whole Foods & the ETFs that hold some of these Specialty Grocers. But, caution should now reign supreme as recent price highs are being accompanied by something that hasn’t occurred since the last major top in Whole Foods and the markets.
Whole Foods made a new high in 2004 around $24, but then after a pullback went on to make another new high at the end of 2005. However, that new price high was not accompanied by as much momentum, signaling the end of the trend and shown in the bottom portion of the chart.
A similar setup today exists in Whole Food’s chart. In 2012 Whole Foods made a new all time high nearing $50, and then it pulled back into 2013. Since then it has also made a subsequent new high, but this time as well it is thus far accompanied by less momentum.
If price falls through the trendline that captures all of Whole Foods gains since the 2009 price low, it will be a sign that once again a new high accompanied by less interest is warning of a significant top in price.
The First Trust Consumer Staples ETF (NYSEARCA:FXG) holds companies such as Whole Foods & Sprouts in its portfolio. Whole Foods actually is its largest holding at 6.8% and is another way to play the Specialty Grocer sector.
FXG is also shown in the chart as it displays similar characteristics to Whole Foods. A breakdown in the high flying specialty grocer stocks, such as Whole Foods, would be a sign that FXG’s run is also likely over.
Another ETF offering Specialty Grocers is PowerShares Dynamic Retail (NYSEARCA:PMR) which includes Sprouts and Fresh Market in its holdings.
On 9/24 we made a similar observation with financial stocks in our article, “Rough Road Ahead?” when financial stocks were similarly close to breaking down from their long term trend. Since then the Financials Select Sector SPDR (NYSEARCA:XLF) has underperformed the S&P 500 (INDEXSP:.INX) for the first time since the March market top as investors continue to shift out of financials for other sectors.
A similar breakdown in Whole Food’s trend may signal a similar fate of its underperformance going forward.
Right now the specialty retail trend is up, but similar to what happened in 2006 as well as more recently to financial stocks, a break in trend would be a bad omen for the 100% club.Editor's note: This story by Chad Karnes originally appeared on ETFguide.com.
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