As the Fed Ends Its Assault on Inflation, These Sectors Will Break Out Big

By TradeSmith Research Team

I’m a quantitative investor.

I trust data… numbers… because it helps me make better decisions – with a high probability of success. Data helps shove aside emotion, gut feelings, rationalizations, or anything else that can distort my view of what’s really going on. (I’ve been there before, and it didn’t end well.)

But that reliance on data doesn’t mean I’ve checked my brain at the door. Data never leads me astray. But thinking for myself made me recognize the need for this data-based system – and helped me identify which bits of data mattered… and which didn’t. It was my brain that helped me develop and program Quantum Edge system to begin with.

There’s a lesson here: Magic is created when quantitative (data) and qualitative (brain-based) analyses intersect – and when they zero in on the same moneymaking opportunities.

Just look at what’s happening as we enter a new phase for stocks.

Over the last 14 months, the Federal Reserve has raised interest rates 10 times. Investors accepted those rate hikes as necessary to tame inflation, but they are now asking when the central bankers will stop the rate increases – before they overdo it and tip us into recession.

If the central bank didn’t actually hit “pause” yesterday, at least its index finger is hovering above that button – and can push it at any moment.

The largest-and-darkest cloud that’s been hanging over stocks is starting to break up.

Stocks didn’t lift off right away. In fact, they slipped less than a percent yesterday and today. That’s fine. We can expect more bumpiness for a time, as concerns won’t immediately fade away.

But the path forward is clearer. And for the reasons we talked about in Monday’s Power Trends (“4 Catalysts to Launch the Next Big Lift In Stocks”), that path points to a stronger market and higher stock prices.

Now is a crucial time to get in position before the Big Lift kicks into gear.

In a meeting earlier this week, I outlined my bullish view and my expectations for what’s to come. Someone said, “I want to go out and buy stocks right now.”

My response: “I see no reason why you wouldn’t.”

I’m saying the same thing to you. And if you want to know what stocks to buy, I recommend you start where the biggest-and-most=dependable profits will come from – the Technology and Discretionary sectors.

Both quantitative and qualitative evidence back that up.

The Quantitative Evidence: Big Money

My Quantum Edge system ranks stocks and sectors based on factors the best predict future profits – strong fundamentals and technicals, and Big Money inflows.

Every night, my computers pull the important data, run the analysis algorithms, and assign a Quantum Score that helps us determine whether a potential investment is likely to make money, lose money, or not do much of anything.

Here’s what we know about the strongest sectors over three time periods…

  • In the last week: Discretionary is the top sector with a Quantum Score of 60, followed by Technology at 57.2.
  • In the last month: Discretionary is again atop the list with a Quantum Score of 60.8. Technology is right behind at 59.9.
  • Since the beginning of the year: Discretionary leads the way in 2023 with a Quantum Score of 61.7. Technology follows at 60.8.

As you can see in the table, my Quantum Edge system also assigns each sector (and more than 6,000 stocks) its own Fundamental Score and Technical Score. The fundamentals of the top five sectors all rate between 58 and 60, but the real separation takes place in the technicals. Only Discretionary and Technology score above 60.

That’s because of Big Money, which my system sniffs out based on my experience as a middleman facilitating Big Money trades.

Big Money moves stocks. It is responsible for 70% to 90% of daily trading volume but tries to move stealthily. As investors, we gain a huge edge knowing where that money is going.

Discretionary and tech stocks have been on the receiving end of that Big Money more than any other sectors of late. This chart shows Big Money buys (green bars) and sells (red bars). There’s volatility, of course, but buys vastly outnumber sells.

Technology looks almost identical.

We enter this next phase in the market with records amount of cash sitting on the sidelines, which I showed you in the last Power Trends article. Big Money is under pressure to generate some returns on that cash, and the latest news from the Fed should start to open up the stock spigot.

There is every reason to expect Big Money will flow even more into tech and discretionary stocks because of the data, and also because it’s just common sense.

The Qualitative Evidence: Growth and Innovation

Just look around and try to imagine life without the technology that surrounds you.

I’m sure we’d find a way to adapt if we had to, but there’s no way we’re giving it up willingly. Businesses and consumers alike are addicted to technology and all it enables.

Tech has led produced the biggest profits over the last 15 years, and that’s not going to change anytime soon.

Technology is also directly related to consumer spending. A survey by S&P Global and the Consumer Technology Association estimated that consumers around the world spent more than half a trillion dollars on technology in 2022.

That’s during a tough global economy. People may not be buying the newest refrigerators with smart screens built in when money is tight and prices are high. But they will.

Technology is where the most innovation takes place, and cool new things keep coming out.

Some of it is admittedly of marginal value, like Nike’s (NIKE) color-changing shoes. (Nike’s Quantum Score is a solid though not spectacular 67.2.)

But other innovations are absolute game changers and life enhancers. I am incredibly thankful for my diabetic father’s automated sugar reader and insulin pump that maintain levels far better and less painfully than finger-prick blood samples and manual insulin injections.

You can find a tech connection in almost everything, from smart diapers that alert you when they need changing to robotic surgery systems that allow a doctor to operate on a patient halfway around the world.

Technology is ubiquitous, which means we can’t have a stronger economy and a bull market without growth in technology.

And because two-thirds of our massive economy is consumer spending – with technology being a big chunk of that – we can’t have a bull market without discretionary stocks also continuing to be one of the leaders.

Companies Like…

My system identifies the best stocks in the market with the highest probability of making money, so you won’t be surprised to hear that I have focused on discretionary and tech for much of the last six months.

They have been among the elite stocks with the best fundamentals, strongest technicals, and lots of Big Money flowing in.

The strongest stocks in the strongest sectors are often your strongest opportunities.

I’m talking about Discretionary companies like…

  • Skechers U.S.A. (SKX): Well-known footwear company with a Quantum Score of 84.5; shares are up 27.6% this year.
  • Wingstop (WING): Global restaurant chainwith a Quantum Score of 82.8; shares are up 58% this year following this week’s post-earnings spike. (I own WING in a managed account.)
  • Boyd Gaming (BYD): Casino and entertainment company with a Quantum Score of 81.0; shares are up 28% this year.

And Technology companies like…

  • Microsoft (MSFT): The tech giant posts a Quantum Score of 84.5. with excellent fundamentals; shares are up 27% this year.
  • Motorola Solutions (MSI): The name once associated with cell phones is focused on public safety and business security. Its Quantum Score is 77.6; shares are up 12% this year.
  • IMAX Corp. (IMAX): The entertainment technology company has a Quantum Score of 77.6; shares are up 37% this year.

I haven’t recommended those stocks, but these are the kinds of stocks – the ones with the trifecta of fundamentals, technicals, and institutional buying – that get you the most out of Big Lifts.

And even if the Big Lift takes a while to unfold, these are the kinds of stocks most likely to make you money anyway. The data proves it.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends

P.S. I did just recommend a new stock in Quantum Edge Trader yesterday.

It’s a leader in its industry, and unlike many companies this earnings season, it raised expectations for the year.

The stock has pulled back off recent 52-week highs, giving us a good entry point.

Click here to learn more about my system and how to get all of the details on my latest recommendation.