What We Need to Hear Before These Sectors Rebound

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These are the most oversold stocks in the market… Here’s why, and how it could change soon… A new crop of Big Money targets… Nvidia’s insider selling is no warning sign… In case you missed it: an interview with a self-made trading millionaire…

Scanning through the most oversold sectors on the TradeSmith Analytics dashboard, exclusive to our esteemed Platinum subscribers, three tickers stood out to me: the Invesco Solar ETF (TAN), the Select Sector Materials ETF (XLB), and the iShares Home Construction ETF (ITB).

Each of these are below 35 on the Relative Strength Index, indicating an extreme oversold condition.

Even further, TAN and ITB are actually down this year, where XLB is up only about 2%.

Point is, these stocks are hated.

Why?

In a nutshell… interest rates.

Each of these sectors is related to the affordability issue in the real estate sector. Rates are high, so homeowners are holding off buying… and homebuilders are holding off building. And the solar sector is a lending-heavy business, too.

Rates really explain a lot of what we’re seeing in market underperformance. Smaller-cap firms in general are suffering from the high-rate environment. It’s the mega-cap companies with massive cash hoards that are sitting pretty, as they’re able to either earn a substantial risk-free yield on that cash or invest it into their business.

Here’s the thing, though…

❖ The interest rate situation is set to change, and soon…

Two reports out Wednesday showed more evidence of the economy slowing, which should nudge the Federal Reserve toward a cut before the end of the year.

First up is some early labor market data ahead of Friday’s big release (which we’ll cover this Wednesday).

U.S. hiring and wage growth both cooled in June, according to private payroll data from the ADP Research Institute. So, companies are hiring less and giving smaller and fewer raises.

Recurring unemployment claims also rose for the ninth straight week, indicating that those out of work are having trouble finding a job.

But here’s the most telling tidbit, from Yahoo Finance:

There are also scattered signs that companies are paring headcounts due to cost-cutting and softer economic conditions. U.S.-based employers announced 48,786 job cuts in June, according to Challenger, Gray & Christmas Inc. Excluding 2020, the height of the pandemic, that’s the highest number of announcements for any June since 2009.

In other words, we’re seeing job cuts at a level not seen since the end of the Great Recession.

But unlike then, when the recession was brought on by failing financial and auto companies and a real estate bust, this time it all comes back to rates. Companies are aggressively focused on cost-cutting because the cost of borrowing capital is so high. The Fed’s rate hikes took some time to impact the economy, but they now very clearly are.

Traders are understanding this, and they’re progressively thinking the Fed will cut soon. Take a look at the latest FedWatch numbers. This chart shows nearly 75% of market participants expect the first rate cut at September’s FOMC meeting:

As I’m writing on July 3, the odds are at 68% that we’ll see a 25-basis-point cut in September, up from both a day and a week ago. The odds of a 50-point cut also rose over the past day.

Now, let’s bring two ideas together.

With a rate cut now likely just two months away, those wildly oversold sectors I mentioned – solar stocks, home builders, and materials – are looking like the squeaky wheels set to get the grease.

Buying them today could prove a great trade once credit conditions start to finally ease.

❖ Of course, winners also keep winning…

And if they’re winning now, just think of what they’ll do when the Fed helps loosen up the economy.

Each week in TradeSmith Daily, we publish the most recent Quantum Edge Hotlist from our in-house institutional money flow expert, Jason Bodner.

On Monday afternoons, Jason sends this list out to his Quantum Edge Pro subscribers. It contains both the top-ranked stocks targeted by Wall Street money managers… and the ones they’re tripping over themselves to get rid of.

Here’s last week’s list:

At the top we’re seeing a minor shakeup. Last week, Nvidia (NVDA) and Google (GOOG) were among the highest-ranked companies. This week, we’re seeing Camtek (CAMT) take the top spot.

The list is still overwhelmingly concentrated in semiconductors and internet companies. But we’re starting to see some other sectors slip in – like Biopharma, represented by Halozyme (HALO), and Hospitality Services, with MakeMyTrip (MMYT).

At the low end, we have the Big Money’s most hated stock of the last few weeks, Beyond (BYON) – formerly Overstock.com. Joining it are a few biopharmas and, in a development that shows us how a rising tide does not necessarily lift all boats, a semiconductor stock called Wolfspeed (WOLF).

Jason’s subscribers get access to this list every Monday afternoon, highlighting the latest Big Money buy and sell signals, along with a broader market and portfolio overview. The next such update should land in inboxes later today.

If you’d like to join them to get first access to these names, along with Jason’s curated model portfolio, go here for more info on a Quantum Edge Pro subscription.

And speaking of big money selling, there’s a notable stock experiencing waves of insider sales that we need to talk about…

❖ Nvidia CEO Jensen Huang sold $169 million worth of stock in the last month…

And he’s not alone. Other Nvidia executives and directors have sold some $700 million worth of stock in the first half of this year.

Now, should you run off and sell your NVDA because they are? No… at least not for this reason.

Insider selling may seem like opportunistic moves ahead of imminent stock crashes, but keep in mind: They only make headlines once they’re reported. In reality, these sales are determined months in advance – Jensen’s, for example, was decided back in March.

That said, there is one place to look for warning signs of this kind of activity: the U.S. Congress.

Rep. Nancy Pelosi, long observed as one of the more successful government traders, recently sold 2,500 shares of Tesla (TSLA) and 2,000 shares of Visa (V).

During the same filing, she bought two large positions in NVDA and Broadcom (AVGO), along with $800 call options on Broadcom set to expire in June 2025.

Setting aside the important issue of whether our representatives should be trading stocks, given their access to closed-door info, we can look at this as a mild bull signal for semiconductor stocks going into 2025.

❖ In case you missed it: an interview with a self-made trading multimillionaire…

Click here to watch my interview with Tom Gentile of Gulfport Analytics, who’s an inspiration to any of us trying to DIY our portfolio.

Tom learned to trade from the “school of hard knocks” by using technical analysis software in his parents’ basement. He got good enough at it that he was able to quit his IT job and head to the American Stock Exchange.

From there, Tom co-founded an options education business and became one of America’s foremost pattern traders.

In fact, there’s a pattern you should know about that Tom’s identified among the AI stocks…

Tom’s holding a free webinar tomorrow on how to trade the “Final Phase” of AI. With one click, you’ll automatically be registered to attend.

He’s not one to buy and hold these stocks, or to recommend that anyone else do so at this point… but he is excited to show you how to trade them short-term with huge profit potential.

See, Tom makes it a rule to recommend trades that last 35 days or less and where he sees double- or triple-digit profit potential. In the past few years, he’s given his followers the chance to double their money 182 times using his proprietary pattern indicators.

This short-term cycle, Tom says, is the key to making the most of the AI trade. Rather than try to pick the winners for the long term, with Tom’s indicators you can buy the best AI stock to own for any given short period.

That’s a huge leg up not just as the AI stocks rise. It’s an insurance policy against big trend changes that you don’t see coming.

Click here to automatically register for Tom’s free webinar tomorrow at 8 p.m. Eastern. I can’t wait to see what he’s got up his sleeve next.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith