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By Lucas Downey, Contributing Editor, TradeSmith Daily


With the first quarter in the books, it’s a great time to sharpen our pencils, jot down what we learned… and consider what could lie ahead. 

We’re asking the history books a few questions today: 

1. As we enter Q2, which sectors historically hold up the best?

Given my latest love for the Energy sector, will it turn out to be a good wager for the next few months? 

Read on and you’ll find out. 

2. Is there a new, under-the-radar group that can stun the crowd with market-beating performance in Q2? 

Surely, most of you will be surprised with this one! 

It’s a lot to unpack, so let’s dive in. 

But first, let’s take a look at what transpired in Q1 2024. A few areas are standing out… 

Q1 Recap: One Loser and One Unlikely Winner

Below details the sector returns for the first quarter. 

• The top group was Communication Services, with a top-notch 15.57% gain.
• In second place was Energy, with a pump of 12.69%. Technology rounds out the top 3 with a 12.48% gain.
• Also interesting to me is what didn’t work. Real Estate was the only negative-performing area, falling 1.36%.

This broadening out under the surface is very important. For the beginning of the year, a handful of stocks were making all the gains. That is clearly shifting, with both Financials and Industrials each outperforming the S&P 500. 

But that was then… what about now? 

Given my recent piece on Energy stocks, will history say to keep owning high-performing oil & gas names? 

The answer is a resounding yes. Going back to 2002, Energy is the top-performing sector with an average 3.36% gain in the second quarter. 

Other notable mentions are Discretionary with a 2.46% jolt, Technology with a 2.24% lift, and down-and-out Real Estate with a homely 1.95% return: 

Now that I’ve gotten the data-driven green light to keep owning energy stocks, let’s flip the script and uncover new insights based on Q1… 

Expect Big Gains from the Least Likely Sector in Q2

While it’s easy to focus on what’s working, I find it often the case to investigate what’s not. 

Just last week I highlighted why history shines brightly on underperforming small-caps. Given the sheer underperformance of smaller companies, it could be commonplace to overlook them. 

So, in this same vein, I asked a question given Real Estate’s down-and-out return in the first quarter. When S&P 500 sectors show a negative performance in the first quarter, how do they behave in Q2 on average? 

What I learned was eye-opening. Since 2002, the S&P 500 sectors tend to bounce hard after a negative Q1. 

Additionally, and likely the hallmark for today, the Real Estate sector is by far the leader of the pack in the second quarter following a negative Q1. On average, the high-yielding group bounces a mind-numbing 8.44%: 

I’ll admit, hanging your hat on rate-sensitive Real Estate stocks is about as popular as a steamy latte on a hot summer day right now. 

But consider the fact that one reason they’ve been in the penalty box is higher interest rates. It stands to reason they’d benefit from the cuts coming later this year. 

And the REIT sector is broad — including mortgages, equities, infrastructure, data centers, and more. Odds are a few of these areas will shine sooner than the crowd expects. 

So here are our main takeaways for Q2: 

• Keep betting on energy stocks in the coming quarter.
• And don’t forget about beaten-down REITs… there’s a decent shot that three months from now you’ll have something to write home about.

If you’re looking for the best stocks to play for these potential uptrends, look no further than TradeSmithsoftware. 

One of my favorite tools is Ratings by TradeSmith. 

There’s no simpler way to tell if a stock is a winner or loser than this software. 

Type in any ticker, and you’ll immediately get a company’s Business Quality Score (BQS) — a quantitative measure of fundamentals. Higher the number, better the company. 

You’ll also get access to the Ratings gauge — which uses several different fundamental and technical factors to determine how a stock should perform in the near future. 

For example, here’s the Ratings gauge for Toll Brothers (TOL) — the biggest U.S. homebuilder: 

It earns this Strong Bullish: 86 rating due to its technical health… the fact that it’s in an uptrend… isn’t overbought or oversold… holds a respectable BQS of 76… and appears on two institutional investor portfolios. 

All that information contained in one single gauge, and available on the thousands of stocks we track in our database. 

Don’t fly blind in the market, especially when you’re shopping for great real estate stocks to take advantage of the historical trend.

Regards, 

Lucas Downey 
Contributing Editor, TradeSmith Daily