History Says to Avoid These Stocks for Now

This is the kind of sector you must avoid… especially in today’s market.

You see, despite the recent pullback, U.S. stocks have soared since March. So naturally, folks are looking at the few things that have been left behind.

They’re looking to go bottom-fishing.

Longtime readers know this is a terrible idea. The smarter bet is always to follow the trend, not fight it. But most investors miss that crucial lesson.

Today, they’re chasing energy stocks… a sector that’s down 47% for the year.

In fact, demand for energy stocks is near decade-plus highs based on one measure.

This huge bullishness has been a warning sign in the past. If history is any indicator, these investors are making a suckers’ bet – and more downside is likely from here.

Let me explain…

There’s one way to know when an investment is running out of steam: when the secret gets out.

That’s when investors really start talking about an opportunity. More important, it’s when they’re all buying… and buying big.

Well today, the secret has gotten out that energy stocks haven’t kept up with the broader market. And folks are looking to take advantage of that and buy the beaten-down sector.

To see it, all you have to do is look at shares outstanding for the Energy Select Sector SPDR Fund (XLE)

XLE is an exchange-traded fund (“ETF”). This structure means it has the ability to create and liquidate shares based on demand.

So when investors want nothing to do with energy stocks, XLE simply liquidates shares. And when investors all want to own this sector, XLE creates new shares.

That’s what we’ve seen lately. XLE’s shares outstanding recently hit a decade-plus high. Check it out…

You can see demand for shares of XLE has skyrocketed in 2020. Shares outstanding recently hit their highest level on record.

As I said earlier, investors are bottom-fishing. But based on history, this is a sucker’s bet. That’s because the last two times shares outstanding hit multiyear highs, XLE fell double digits over the months that followed.

We saw a similar event take place in April 2011. Demand for energy stocks was at multiyear highs. Then, the sector tanked… XLE fell 29% in roughly six months.

This happened again in early 2018. Demand for energy stocks spiked. And the results were darn near the same…

Energy stocks fell 28% from late January into mid-December that year. It was another brutal fall for anyone who bought near the top.

Simply put, investor demand for XLE recently hit record levels. That’s not what we want to see as contrarian investors.

History tells us this is a sector to avoid for now… More losses are likely in the months ahead. So please, don’t fall for this suckers’ bet.

Good investing,

— Chris Igou

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Source: Daily Wealth