The stock market went ape for artificial intelligence ("AI") last month... But some truly important companies are getting left in the dust.
Tech giants with heavy AI interests – like Microsoft, Meta Platforms, and Alphabet – are all up double digits. And AI chipmakers surged even more...
For example, Nvidia's share price soared to all-time highs on Thursday. That move ended just shy of the largest one-day gain in market capitalization of any U.S. company in history.
It's an exciting time for companies on the leading edge of tech. But investors are funneling out of other parts of the market to get in on the craze – and they're dumping one sector in particular.
Now that sector is oversold. And it gives us a great opening to buy some of America's most important businesses... while no one else is paying attention.
Let me explain...
Investor dollars are flowing out of consumer staples.
You probably know these companies well. They make and sell the household products that we use every day. Some consumer-staples giants include Walmart (WMT), Procter & Gamble (PG), and Coca-Cola (KO).
These companies enjoy steady demand and predictable revenues. They tend to be safe havens for investors in uncertain times... But when the market goes "risk on," this sector is often one of the first to fall.
That's exactly what's happening today. We can see it through the Consumer Staples Select Sector SPDR Fund (XLP)...
This exchange-traded fund holds a basket of consumer-staples stocks. It reflects the sector as a whole.
As AI mania took hold last month, XLP dropped more than 5% in a little more than two weeks. That's a sudden fall for this typically boring sector. And it pushed the fund into "oversold" territory last week, based on the relative strength index ("RSI").
This indicator tells us when investors are going overboard. If an asset's RSI rises past 70, it's "overbought." That means investors have bought too much, too fast... And a pullback in prices is likely.
If an asset's RSI falls below 30, it's "oversold." That means investors have sold too much, too fast. And it's often a signal that prices are about to surge higher.
Today, consumer staples are oversold for the first time since September 2022. Take a look...
It's rare for XLP to hit this kind of level. The fund has only been oversold for about 2% of its history. And, importantly, buying on oversold moves tends to lead to outperformance. Take a look...
As I mentioned, XLP tends to generate steady returns. It goes up about 6% in an average year.
But buying after cases like today's would have led to 2-to-1 outperformance. XLP returned about 12% the year following these oversold signals.
Even better, a year after an oversold RSI flashed, consumer staples were positive about 88% of the time. So if you take this opportunity to buy, the odds are in your favor.
Consumer-staples companies are some of the safest stocks in the market. But investors have abandoned them in the recent AI craze.
That means buying this sector today – while no one else cares about it – could give you a great shot at outperformance... Don't miss out.
Good investing,
Sean Michael Cummings
Further Reading
"You have the potential to make the biggest gains when you buy what other investors hate... assets they've left for dead," Brett Eversole writes. The catch is, you have to be right that the market is wrong. But if you master this skill, it can give you a huge edge... Learn more here.
The hype over AI is accelerating. But new technology will always come with limitations and hurdles to jump – even when the long-term potential is impressive. Here are a few angles to consider as AI takes its first steps onto the scene... Read more here.
