Stocks Are Going Higher – Just Not This Sector

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BY LUCAS DOWNEY, EDITOR, TRADESMITH’S ALPHA SIGNALS

There’s a lot to process in the world of investing.

On one hand, stocks are practically at all-time highs… just a few percent away. On the other, traders are dealing with plenty of headline risks.

Tariffs, interest rates, and inflation have taken center stage lately.

And on Friday, investors woke up to learn that Israel bombed Iran. This has caused crude prices to skyrocket, up over 6% at the time of this writing.

It hasn’t been easy navigating markets in 2025. That said, I find these uncertain times best handled through the lens of cold, hard data.

Today we’ll offer up two powerful signal studies. First, we’ll unpack a rare market-wide momentum signal that hints at big gains around the corner. Then we’ll put some historical perspective on Middle East tensions… looking for guidance on the path of energy stocks.

Finally I’ll offer up an under-the-radar nuclear name worthy of investigation…

But first, let’s dive into where things stand.

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S&P 500 Jumps 20% in Two Months

Few would deny we’re living in a unique period in history.

I can’t think of another time investors have had to navigate tariffs, the rise of a breakthrough technology like AI, and a prolonged period of higher interest rates all at the same time…

We’re in totally uncharted territory.

Even the price action is unique. The S&P 500 just leapt at a pace rarely seen.

From the market low on April 8 to June 5, the large-cap benchmark ramped 20.4%:

Now, I’ve been on record discussing how 2025’s tariff crash feels eerily similar to the COVID-19 crash.

Turns out, the last time the S&P 500 gained 20% in a 41-session period was June 5, 2020… coming off the heels of one of the steepest market declines in recent memory.

I went back and culled together all instances the last 40 years where the S&P 500 gained 20% or more in a 41-day period.

To my surprise, it’s only occurred 22 times. So, this is extremely rare action.

More to the point, these super-thrusts are triggered after monumental declines like:

• Once in 1991 (early ‘90s recession)
• 3 times in 1998 (Russian Financial Crisis)
• 10 times in 2009 after the Great Financial Crisis
• 8 times in 2020 after the COVID-19 crash

What this tells me is this: We shouldn’t be surprised at the steep recovery given the epic tariff crash just months ago.

But let’s get to the million-dollar question on everyone’s mind: What comes after these parabolic thrusts?

If you’re a bear, look away now… because what follows has been nothing short of incredible.

Here’s how the S&P 500 performs after gaining 20% or more in 41 trading sessions:

• 3 months later stocks climb 10.9%
• 6 months later equities jump 17.2%
• 12 months after the market gains nearly 30%
• 24 months later markets are up 37.3%

Please note that stocks have always been higher three months later and beyond…

With a historical picture like this, let’s stay constructive.

Should we expect the S&P 500 to leap 30% to 7800 next year?

Likely not… But don’t be surprised if it does!

We are in the midst of a massive risk-on rally. Now is the time to buy great companies on any dips possible.

But there is one popular area you’ll want to avoid: energy stocks.

Crude Oil Surges After Israel Strikes Iran

Wars are terrible. But sadly, they’re a part of life.

And while I’m no war expert, I’ve learned to not overract when painful news stares us in the face.

Oil prices are surging after the bombing as investors fear supply disruptions from the oil-rich Middle East.

Below is a snapshot of crude oil futures jumping over 6% post the event:

As expected, oil and gas stocks have jumped as well. You can see this via the Energy Select Sector SPDR ETF (XLE), which holds a basket of oil majors.

Exxon Mobil (XOM), Chevron (CVX), and ConocoPhilips (COP) represent over 40% of the basket.

The group is at one-month highs:

Now, conventional wisdom may have you assuming oil stocks are a good bet given the Middle East tension.

But I went back and studied this assumption…

Looking at six prior Middle East skirmishes, I found that oil and gas stocks actually underperform after these rare geopolitical events.

Below lists the forward returns for the S&P 500 Energy sector after six Middle East conflicts including:

• Israel/Hezbollah war in 2006
• Israel/Gaza conflict in 2021
• Hamas’ attacks on Israel in 2023
• Iran’s attacks on Israel in 2024

Here’s how the S&P 500 Energy sector performs after Middle East conflicts:

• 1 month later the group is down 2.4%
• 3 months later the sector falls 11.4%
• 6 months later stocks are nearly flat with -2% returns
• But 12 months later, we see market-beating gains of 15.9%

Also notice the low hit rate from this small sample set. On all timeframes except 12 months, the Energy sector is higher either half the time or worse.

Now to be clear, the assassination of Qasem Soleimani, a top Iranian general, in January of 2020 skews the results as this came just before the epic COVID-19 crash.

However, the bottom line is it may not be a wise idea to chase energy stocks today solely on the basis of the conflict.

Over time, the battles will ease.

Focus your attention on the overall trend of the market and bet on the best-of-breed companies identified by TradeSmith software.

One idea is Talen Energy (TLN). This nuclear energy play recently announced a big power purchase agreement with Amazon.com (AMZN). (Disclosure: I hold a long position in AMZN.)

This power company, founded in 2014, surged to new highs after the announcement, stating:

Talen enters power purchase agreement for 1,920 megawatts of carbon-free electricity at full quantity to support Amazon operations, and explore SMR [small modular reactor] technology

In a bull market that’s expected to keep climbing, companies levered to big themes like nuclear energy needs is how you take full advantage.

Talen, which had sales of $2.29 billion over the last 12 months, is set to see enormous growth.

Estimates peg revenues two years from now at $3.15 billion… a whopping 37% increase.

Earnings, which are set to decline to $6.07 per share over the next 12 months, should surge in the longer term. Two years out, earnings are estimated to significantly increase to $16.16 per share.

This doesn’t surprise me one bit given the elite rank this name commands in Jason Bodner’s Quantum Edge system.

If you aren’t familiar with the strategy Jason uses in his Quantum Edge Pro research service, he ranks each stock based on two Power Factors:

1. Superior fundamentals – stocks with the best growth rates in sales, earnings, and profit margins
2. Strong technicals – stocks in bullish price patterns with the volume signals only possible with the help of big institutional buying

With a Quantum Score of 82.8, this tells us not only is the company rocking in the Fundamental category, but also Technical as well.

This is my go-to green-light indicator for any stock:

These are the types of companies flying under the radar right now while everyone is focused on major indices.

There’s new leadership in this new bull market. Don’t waste your time with low-quality stocks that don’t hold up to the Quantum Edge standard. You’ll just end up disappointed.

(If you’d like to learn more about how Quantum Edge Pro can help you find the best investments in 2025’s rocky markets, click here now.)

And heed the fact that the market has jumped 20% in two short months.

History says a crowd-stunning rally is in the cards.

Take advantage with state-of-the-art software at TradeSmith… And get your portfolio into shape before the next leg higher.

Regards,

Lucas Downey
Editor, TradeSmith’s Alpha Signals