A Rare Buy Signal in a Surprising Sector
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Grab a pair of binoculars, you’ll find 100,000.
Use a telescope and you’ll see 50 million!
Stargazing is much better with the proper tools and gear.
The same goes for the stock market.
Focusing on basic indices that you hear about in the mainstream media, or track on CNBC, reveals a small sliver of what’s really happening. Diving deeper uncovers rare bullish setups hiding in plain sight.
That’s exactly what’s going on in the Utilities sector right now.
Many investors consider utilities a boring investment.
But this signal has a forward profile that’s going to surprise you.
We’ll get into the PROOF as we usually do, but first, let’s see where Utilities stocks stack up versus the market. They’re experiencing extreme underperformance in 2023.
The Utilities Select Sector SPDR Fund (XLU) is down 8.46% YTD. That trails the S&P 500 by over 25%!
Looking at price alone won’t reveal a bullish opportunity. Focusing on big, unusual trading activity does.
After spending years on Wall Street, I’ve learned to respect volume behavior that’s out of the ordinary. A great way to visualize what I mean is with the following unique data set.
Below plots the daily buy and sell counts of institutionally tradable Utilities stocks. This chart isn’t looking at order flow, rather it’s tallying the number of stocks gaining or falling alongside outsized volumes.
These data points are indicative of institutional footprints.
Keep in mind, each individual stock trades with its own behavior. So, this signal captures unusual trading activity.
Notice how September 5 had a huge red bar, highlighting 26 Utilities stocks were sold:
That amount of red is eye-catching, as it should be. Whenever 26 discrete equities, from a universe of 49, get sold — it’s super rare.
It’s indicating forced selling is taking place. That’s when large institutions are likely reducing their risk across the board.
Going back to mid-2020, just three years ago, reveals a total of five instances with similar outflows:
This level of selling is extremely rare.
More importantly, notice how those red bars don’t hang around long.
When stocks see capitulation like this, value hunters swoop in and buy the fire sale.
This is the epitome of the Wall Street adage of buy low, sell high. Historically, these lows offer a compelling buying opportunity.
Don’t take my word for it, though. Let’s prove it!
I’ve isolated similar sell points going back to 2013. For this study, I’m looking at days where 20 or more Utility stocks were sold.
Prior to September 5, it’s only happened 33 times… roughly three times a year.
Incredibly, 1-week to 1-year averages stunningly positive returns:
One month after these outflows, XLU ramps 5.3%.
Six months later, XLU gains 10.1%.
Wait a year and returns are nearly +20%!
That’s the opposite of boring.
To drive this point home one more time, the following chart lists the forward returns of XLU following big outflow days compared to all average returns for the ETF.
In orange reveals what you can expect to gain from XLU via each time period since 2013. Compare that to the blue signals when rare selling takes place.
It’s not even the same sport:
This reveals the importance of using software to enhance your investing. Having data-based tools in your arsenal will keep you ahead of the game.
Based on this analysis, Utilities stocks are set for a monster run.
Telescopes bring the stars to light.
Data illuminates the markets. That’s what TradeSmith is all about.
If you’re looking for explosive stock picks, utilizing a data-enhanced edge, sign up for Quantum Edge Pro. Jason Bodner uses a data-dependent, evidence-based approach to find market beating stocks.
He just released one of his favorite under-the-radar AI picks just last week (friendly reminder that subscribers must be logged in to access).