Investors were looking for a reason to sell – and they got one...

Tariffs have gone from rhetoric to reality in recent weeks. The news called the health of the U.S. economy into question. And as investors panicked, stocks fell.

Not all areas of the market were hit equally, though. Companies with direct ties to the consumer economy have been hit the hardest. And that pushed one sector to massively "oversold" levels.

We haven't seen things get this bad since February 2020. But according to history, this setup is a good reason to expect a reversal. And that means this sector could see a 24% rally over the next year.

When the economy is in doubt, investors sell the companies that provide the "extras."

This group is known as the consumer-discretionary sector. These companies sell all the stuff you can do without if you fall on hard times.

You can live without a Starbucks coffee... or a renovation that involves a dozen trips to Home Depot... or an easy meal at McDonald's. And if money gets really tight, you can even cut back on your Amazon purchases.

These companies' stocks all fit into the consumer-discretionary category. They're directly linked to a strong economy. So it's no wonder they crashed when everyone started worrying about the economy.

This sector nearly entered a bear market last month. But we should expect a reversal soon...

Consumer-Discretionary Stocks Are Deeply Oversold

These stocks recently hit a rare oversold level based on the relative strength index ("RSI"). This indicator looks at recent market action to tell us whether an investment has moved too far, too fast.

When an investment hits an oversold level, it means there aren't many sellers left to push prices lower. And if prices can't go lower, they tend to bounce back. That makes the RSI a useful contrarian signal.

In the case of the consumer-discretionary sector, we recently saw an RSI of less than 23. That's well below 30 (the level that we typically consider oversold). Take a look...

The recent reading below 23 is darn rare. It's the worst we've seen since 2020. And we've only seen five similar examples over the past 20 years.

The good news is, the more extreme an RSI reading is, the more likely we are to see a reversal. A reading below 23 in this sector has a perfect track record of success over the past two decades. Take a look...

Consumer-discretionary stocks thrive when the economy does well. And that has led to impressive long-term gains. The sector has returned 10% a year over the past two decades.

That's only part of the story, though... because you could have done dramatically better if you'd bought after this group hit deeply oversold levels.

Similar setups led to 7% gains in three months, 11.3% gains in six months, and an impressive 24.1% gain over a year. That's spectacular outperformance. Plus, the sector was higher a year later 100% of the time.

Consumer-discretionary stocks may have taken a beating in recent weeks... But according to history, investors got ahead of themselves when they ran for the exits.

History shows this is a powerful contrarian setup. And it makes a rally likely, starting now.

Good investing,

Brett Eversole