The downtrend in equities continues. For weeks our indicators have pointed to softening prices, nailing the latest pullback in stocks.
But there’s a silver lining. Selloffs eventually reach extreme points, prompting a high-probability bounce.
Today I’ll make the bullish case for Utilities stocks. History points to a great risk/reward setup for the sector.
Consider this: on a dark night, the naked eye can see up to 3000 stars. Adding a simple pair of binoculars, the total climbs to 100,000. Use a telescope and the number jumps to 50 million!
Without question, stargazing is limited without proper tools and gear.
The same goes with the stock market. Viewing basic indexes only scratches the surface of what’s really transpiring.
By using unusual volume software, powerful trends appear.
This week, our data brings one oversold area into focus, Utilities stocks. They’re by far the weakest sector in the market YTD, falling 9.34%. One contrarian signal points to massive gains ahead for the group.
Before we jump to that study, let’s first put on our market binoculars… there’s a lot going on!
This barometer has been spot-on the past year, foreshadowing the biggest trend changes. We are in the middle of a pullback now. Since becoming overbought (circled), sellers are in control. The BMI has been falling hard recently:
The trend is your friend when it comes to markets. Diving deeper we can see how selling has increased as buyers dry up. This is typical action supply and demand mechanics after an overbought instance. It’s what you can expect when there’s overhead supply of stock
Let’s visualize that supply. The Big Money Stock Buys and Sells chart is like using market binoculars. We’re able to see the increasing sell volumes tugging on stocks:
The overall market trend is important to flag. But too much selling in certain groups can be a positive omen. Let’s dive deeper, and laser in on the most oversold sector in our data right now, Utilities.
History points to big upside ahead.
Inside those big red sell bars are single stocks. Our portal
breaks down the daily action by sector, giving a clear illustration of investor action. Like gazing into dark sky, the celestial picture comes into focus… the same happens with stocks.
Here we note just how extreme the selloff has hit Utilities stocks. On Tuesday and Wednesday of this week, dozens of stocks were sold. This is a level of selling not seen since October:
Tuesday logged 23 discrete sell signals and Wednesday saw 29 distribution signals. Keep in mind, the sector universe is 50 stocks. That puts Wednesday’s capitulation at 58% of the universe.
That’s a rare event indeed. Looking back through history, these occurrences make a bullish case for Utilities stocks going forward.
Below I’ve pulled all dates where 20 or more Utility stocks were sold in a day. Going back to 2013, it’s happened only 31 times. The forward returns for the Utilities Select Sector SPDR Fund ETF ($XLU
) is monstrously bullish.
Post these washouts, a month later the fund gains 5.3% on average. A year later, gains come in at an eye-popping 19.4%. Have a look:
Historically, selloffs of this magnitude are rare and offer a great entry point for investors. There’s a mega bullish case for Utilities stocks once the sellers get out of the way.
Chances are that’s right around the corner.
Let’s wrap up.
Here’s the bottom line: Stocks are still stuck in a downtrend. More importantly, extreme selling in Utilities stocks suggest a big bounce is likely ahead. History points to nearly a 20% gain for the group a year after similar risk-off periods.
Utilizing software brings trading opportunities that are easy to miss without it. MAPsignals is your stock market telescope, illuminating the market’s true moves.
Have a great week!