Don't Fall for This Suckers' Bet

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

Further Reading

"As an individual investor, you need to understand the new rule book if you're going to succeed," Vic Lederman writes. In other words, you need to make sure you put your money to work in the right places today... Read more here.

"If you want to invest successfully in the tech sector, you need to watch out for this fatal flaw," Dr. David "Doc" Eifrig says. You need to know what you're getting into before you invest in the next hot craze... Get Doc's full write-up about what makes a good tech investment right here.

Market Notes
SOCIAL DISTANCING HASN'T STOPPED THE HOUSING BOOM

Today, we’re highlighting a stock that’s booming alongside the housing market…

Regular DailyWealth readers know Steve is bullish on U.S. housing. Mortgage rates are near all-time lows, making homes extremely affordable. This is fueling a surge in sales of existing and new homes – both of which recently hit their highest levels in more than 10 years. That’s a boost for today’s company…

Zillow (Z) is a $23 billion online marketplace for homes. More than 200 million people visit its home-buying platform every month. The broader housing market is already a tailwind for Zillow… Plus, with the pandemic forcing people to stay at home, Zillow is one of the only ways they can search for new houses. That has boosted Zillow’s results… In the most recent quarter, Zillow’s sales jumped 28% year over year to $768 million.

As you can see in today’s chart, shares of Zillow are soaring. The stock has surged more than 300% from its March low, and it recently hit a multiyear high. As long as the housing market remains strong, this stock should continue higher…