The Best and Worst Stocks for February

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

• The year in sector moves so far…
• Which is the best sector bet for February?
• The best stock in the best sector…
• And the worst of the worst…
• A key tech sell signal could be imminent…

As I write, it’s very close to the end of the month…

We’re about to close the books on January and open them up for February.

If you expected volatility to come with the new Trump regime as we did, you were right. The month saw some historic market moves.

And in those moves, we saw money flow out of popular sectors and into underloved ones.

That makes it a great time to check in on sector performance over the past month – a regular ritual of mine.

With this data, we can confirm just where the money went… And with history, we can get an idea of whether those flows will continue.

It also gives me a chance to pop off the macro hat for a moment and don my technical cap…

Here’s this past month’s numbers (as of writing, Jan. 30):

Energy stocks (XLE) were the best-performing group for January, followed by Financials (XLF) and Healthcare (XLV).

At the bottom of the pack were Technology (XLK), with a 2.42% drop… and Consumer Defensive (XLP) and Cyclicals (XLY) stocks trading in the vicinity of flat.

Quite a shake-up, wasn’t it?

Now, what does the data say about the next 21 trading days that will make up February?

I’ll show you:

Going back to the inception of all the SPDR S&P 500 sector ETFs shows us that Energy historically has a great February. Over the last 26 years, it’s been positive more than 65% of the time, with an average winning trade of 7.45%.

Technology historically also has a rough month. It’s up only half the time, and the average trade (counting wins and losses) is down -0.38%. Cyclicals, too, see a lousy month.

In fact, most sectors have historically traded negative on average in February. That’s not too surprising, though – February is the second worst month for the S&P 500, with a -0.2% average return since 1945. That’s second to only September, which sees a drop of -0.6%.

February might wind up a boring month. But we don’t have to settle for boring returns.

On the contrary, flat periods like this are perfect for options selling strategies.

Our Options360 software finds us the highest-probability put options to sell for upfront income; by stacking these up day after day, we keep the cash flowing in even as stocks tread water. You can hear about this and other options selling “tricks of the trade” at this link.

But that’s not all we can do with this data…

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Let’s target the upside and downside…

If the Energy sector is set to be the best performer this month, we can take it a step further and find the best stock in that sector to trade.

And if Tech is set to fall the most, we can take it further and target the weakest of the pack.

Here are the results for trading the top 10 stocks held in the XLE ETF through the month of February:

Among the top 10 XLE holdings, The Williams Companies (WMB) has the highest win rate through February at 87.3% over 52 years of data… and EOG Resources (EOG) at 35 years young puts up the highest average trades and second highest average win with 3.94% and 11.06%, respectively.

Kinder Morgan (KMI) boasts both the lowest win rate and the highest average winning trade… So that might be something to look at too.

Now, let’s see who we can beat up on in tech:

If you were looking for a delicious short trade in the tech sector for the month to come, you might wind up disappointed.

While the weakest sector historically for the month of February, Tech still posts relatively solid win rates and average trades across the board. The strongest being Salesforce (CRM), with a 70% win rate for February going back 20 years, and an average trade of 4.59% and an average winning trade of 9.72%.

Even the weakest stocks don’t put on much of a bearish show. Microsoft (MSFT) has been higher 39.5% of the time in the 38 years it’s been trading, with its average trade result being the poorest at -0.43%.

If you absolutely must short something in tech in February, make it Cisco Systems (CSCO). The stock has been higher just over half the time, but its average loss is the highest of the group at -8.34%.

In summary: If you were long energy in January and happy about it, history says there’s more good tidings coming your way.

And if you, like seemingly the rest of the market, are looking for a reason to sell pricy tech stocks, February’s seasonality gives you some proof to lean on.

At the same time, the general resolve in tech through even its worst seasonal period should give you pause before shorting anything. Really, I see the numbers above as a plan for what to buy should it see an abnormally large February loss.

I would be remiss not to mention that all of this data come courtesy of our seasonality software, part of our Trade Cycles membership…

And that this is the tool that we’re most excited about as we embark on a new year in the markets.

For example, our CEO, Keith Kaplan, was able to alert thousands of people to the fact that Netflix (NFLX) was about to have one of its best seasonal windows of the year open on Jan. 17 – which was nine days away at the time – and NFLX promptly shot 14% higher on its earnings report right during that window.

Now that our new Seasonal Edge strategy launched within Trade Cycles, we also just had a quick 5% win on PTC (PTC)… which was worth 75% in profit for those who opted for the PTC call option we recommended.

If you’re one of the many who signed up to Trade Cycles, stay tuned to your inbox for guidance on the seven other trades Seasonal Edge currently has open.

And if you’re not, we’ve now opened membership back up after closing down our charter offer earlier this month. Details here.

Before you get to trading, let’s zoom in on the sector rotation a bit…

It’s important to look beyond the vacuum of sector returns. We want to see not only which sectors are performing well, but which are forming new uptrends or downtrends against the market itself.

New trends confirm strong rotations in or out. And these can be helpful to confirm great trades during seasonal windows.

Take a look at Energy stocks vs. the S&P 500, for example, on a weekly basis:

Going back to 2023, energy stocks have been in a prolonged downtrend against the market. No doubting it.

But that downtrend has also been forming a falling wedge pattern. That’s when the highs and the lows of a downtrend pinch closer together. Patterns like this tend to resolve with a breakout to the upside.

Not only that, we see positive divergence on the Relative Strength Index momentum indicator at the bottom. Another good sign for energy.

Understand, this is a long-term trend we’re looking at. It may take quite a few more weeks or months to resolve.

But if XLE/SPY does wind up showing sustained closes above the upper resistance line, currently around 0.16, that would be evidence of a mega-rotation into energy.

The chart of XLK/SPY is interesting, too:

Setting aside the important context that XLK and SPY are not all that different in terms of concentrated tech exposure, we can see that tech has been gaining on SPY for the past five years. You actually have to go back to 2002 to find the all-time low. Barring some underperformance in 2012/2013, it’s been all up since then.

What we see now is that XLK/SPY has broken below what I’ll call the “primary trend” of the last five years – the dotted line above – which has acted as key support and resistance for the ratio since 2020.

It’s now sitting right on major support – the solid line – and threatening to break down. And the last time it traded below this line was during the worst of the 2022 bear market… right before the miraculous 2023 recovery.

This breakdown, to me, would be a signal to take some profits in the frothiest areas of tech. But if the week closes with a bounce off that solid line, and eventually closes back above the dotted line, tech’s reign of dominance should continue.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily