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The Consumer Staples Select Sector SPDR (XLP) ETF recently triggered a put-call ratio buy signal, as its weighted 21-day put-call ratio peaked at extreme levels and began to roll over. This type of signal typically suggests that bearish sentiment has reached a capitulation point, and that upside follow-through is likely, advises Lawrence McMillan, editor at Option Strategist.

The XLP fund tracks defensive consumer staples names like Procter & Gamble Co. (PG) and Walmart Inc. (WMT). It has been trading sideways for several months following an April rebound. The recent move higher, supported by the sentiment reversal in the options market, adds weight to the bullish technical case.
 

However, context matters. When a defensive sector like consumer staples begins to outperform, especially on the back of extreme hedging activity, it can signal growing unease about the broader market.

Investors often rotate into staples when they’re worried about riskier areas such as tech, cyclicals, or small-caps. So, while the signal implies further upside for the XLP ETF in the short-term, it may also reflect a market environment where participants are becoming more defensive.

About the Author

Lawrence McMillan speaks on option strategies at many seminars and colloquia in the US, Canada, and Europe. Prior to founding his own firm, he was a proprietary trader at two major brokerage firms—primarily Thomson McKinnon Securities, where he ran the equity arbitrage department for nine years.

Mr. McMillan is perhaps best known as the author of Options as a Strategic Investment, the bestselling work on stock and index options strategies, which has sold over 200,000 copies.

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