The One Flat Sector of 2025 Is a Buy Today

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Energy stocks have gone nowhere this year
But they’re the best “bang for your buck” in markets
Why later this month could be the time to buy
Here’s what the Quantum Score says about the 10 biggest energy names
Answering your questions on our work-in-progress MVO strategy

The energy sector has had a lousy 2025…

Energy stocks are an important part of any portfolio. That’s due to two attractive measurable factors and one not so measurable.

First, the energy sector is cheap. The average price-to-earnings ratio (P/E) for the energy sector is about 16 – a nice discount to the S&P 500’s average P/E of 27.

Second, the sector pays out some of the highest dividend yields available in the stock market today. As of August, Energy’s average yield of 3.2% ranks a close third behind Utilities and Real Estate.

The final factor isn’t something you can really measure, but it’s something we all know is true.

Energy is the lifeblood of the global economy and all its technology.

Oil, natural gas, coal, nuclear, renewables, and other forms of energy generation are critical not just to advanced technologies, but also to everyday life. Absent some world-changing breakthrough in energy abundance, there will always be a market for energy fuels and moving them around the world.

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Despite this, energy is bottom of the barrel in terms of investor interest…

And that’s usually a good signal to start looking at it.

Energy had a strong start to the year… and was at one point the top performer. But that changed on Liberation Day. And year to date, the Energy Select Sector SPDR Fund (XLE) has returned a big fat zero.

Here are the returns of all sectors and the S&P 500, measured by their SPDR Sector ETFs, where you’ll find Energy at the bottom of the pack:

We warned you at the top of the month that Energy could be the biggest loser. We came to that conclusion by using our seasonality data, which showed Energy had the worst August track record of any sector.

That’s proven to be a valuable insight. Energy was not the sector to buy at the start of August. Only real estate has performed worse. Take a look…

Energy has been a laggard not just in August, but also in all of 2025.

Most recently, traders have been shedding energy stocks in anticipation of a peace deal between Russia and Ukraine… which could end oil sanctions against Russia. On Monday, XLE fell about half a percentage point from its Friday close.

With all this stink on energy, one has to start thinking…

Is there any evidence that taking the other side of this trade could pay off?

TradeSmith’s software holds the answer…

We develop software at TradeSmith that helps you stay ahead in the game of markets.

With Wall Street’s biggest hedge funds running advanced, algorithmic trading programs – some of which spy on your trading activity – that’s never been more difficult or more important.

That’s why we employ dozens of engineers, data scientists, and analysts to help us design this software.

Empowering investors to make market-beating gains is our mission. And we’re constantly surprised to find it’s an otherwise unmet need.

Most investors are flying blind out there, working off analysts’ opinions, mainstream media, or their own gut.

You can do better with TradeSmith.

One example is how our Seasonality tool told you to avoid energy stocks at the start of this month.

Another is how, today, it can tell you to start dipping your toe back into the sector over the next few weeks.

Take a look at our seasonality tool on the XLE. In the past I’ve used other datasets, but below, we’re looking at post-election years.

XLE hit its seasonal trough for the year on Aug. 18. From there through Sept. 16, the sector has been up every post-election year for the past six cycles, except 2001, for an average return of 6.7%:

Expand the range to Oct. 16, and we see an average return of 10.4%.

One key factor for this seasonal trend is how energy costs tend to go up in the fall and winter, when temperatures drop across the Northern Hemisphere. XLE rallying in summer anticipates that dynamic.

So while the market turns on energy here in mid-August, especially with the sector underperforming all year long, it may be a good time to add some exposure.

And we can find the best stocks using our Quantum Score…

Here at TradeSmith, we partner with Jason Bodner to bring users his significant breakthrough in rating stocks – the Quantum Score.

Jason’s system scores stocks on a simple scale of 0-100 based on…

The Fundamental side, which examines factors like revenue, earnings, and profit margin growth. These are the most impactful factors, whether you’re in the energy business or any other, and we’ve found they correlate strongly with higher prices.
And the Technical side, where we look at combination of price momentum and the presence of large-scale buying pressure – or what we call Big Money.

When Big Money pours into a stock, it’s for a good reason. Wall Street institutions have tremendous resources at their disposal to find the best-performing stocks in the market. By following the telltale signs of their buying volumes, we can find those same stocks.

Bringing it back to energy, I put the top 10 of XLE’s holdings through the Quantum Score. Here’s how each of them rank:

It’s illuminating to see such strong fundamentals – but awful technicals.

At the bottom of the list with the lowest Quantum Score is natural gas processing, storage, and transportation company ONEOK (OKE). It has the highest Fundamental score and the lowest Technical score of the lot.

That stock has been in a nasty downtrend over the last year – trading at its lowest price since early 2024 and down 37% from the highs.

OKE is for the speculators looking to buy an otherwise quality stock caught in a downward spiral.

To state the obvious, Big Money doesn’t tend to chase downtrends. So it’s not for the faint of heart and certainly not for a big lump-sum buy. If you like this one, prepare to buy a small amount to start… then add more on lower prices or on the trend’s reversal.

Or take oil-and-gas major Chevron (CVX). This is the only stock in the group above to get a Quantum Score that’s even close to the buy zone. It’s held up by strong Fundamentals, but its Technical score is average and would need to improve before CVX would qualify for Jason’s strategy.

CVX is more expensive than OKE on a P/E ratio basis (20 vs. 14) and has a lower dividend yield (4.4% vs. 5.6%). But this may prove to be a case of getting what you pay for.

The energy sector is facing headwinds right now. But using the Quantum Score, you can pinpoint the right time to buy and get a better idea of which stock could be the best opportunity.

Following institutional investors into winning stocks fueled by their Big Money is a crucial factor that’s not actually visible on regular charts.

That’s exactly why Jason provides you with an overall Technical Score. His unique way of gauging momentum relies heavily on those institutional investors. Jason used to be one himself, and to this day, their trades still control about 80% of the U.S. stock market.

So rather than wasting any of your precious time poring through SEC forms to see what Wall Street is up to… you can just check out TradeSmith CEO Keith Kaplan’s latest webinar to see this “Big Money Index” in action.

See how these signals can forecast enormous breakouts by watching the replay.

Shifting gears, let’s talk about a work-in-progress strategy that’s already proving very popular…

A few weeks back, I shared a writeup of TradeSmith’s Mean Variance Optimization (MVO) model.

This trade algorithm is hot off the testing phase in our Research Lab. It aims to select the best small portfolio of stocks from an index, sector, or any custom group. And we can use it to create highly effective, long-term-oriented rotation trading strategies.

In the simplest of scenarios, you hold a fixed number of stocks and change them once a month as the model dictates. In our research, we’ve found that rebalancing for equal weighting each month improves returns. In other words, you trim back the stocks that ran ahead and add to the ones that fell behind.

One strategy involved trading the model’s top five stocks in the tech-heavy Nasdaq 100. It outperformed the index by 4 to 1 over the last eight years, turning $10,000 into $110,000. (More details in my original writeup).

I hate to use the word “breakthrough” again. But how else can I describe it? We’ve found a way to outperform the most common buy-and-hold strategies using just five stocks – with the only tradeoff being a bit more volatility and some extra work.

We’ve gotten quite a few questions about the strategy since I first shared it with you.

The most common one – particularly from our Platinum members (who get everything we publish, present and future) – is where to access this strategy.

The bad news is you can’t – yet. At least, not outside of the pages of TradeSmith Daily.

Until we launch the strategy – which we’re looking to do sometime soon, though not necessarily in the form in which I introduced it – I’ll update you on the holdings of Nasdaq 100-based MVO strategy near the start of each month.

That strategy may one day make its way into a TradeSmith product, but it’s not the top of our priority list for the model right now.

There’s good news, too. But I can’t share all the details. All I can say is you’ll hear about our plans for the MVO model soon enough. And Platinum subscribers, as always, will be able to access it at no additional charge.

The second most common question we got was about how to use the strategy.

If you decided to start following the strategy in July when we first told you about it, you would buy all five of the stocks in equal dollar amounts and hold them until the start of the next month.

Then you would rebalance the portfolio so all your stocks have an equal weight again. Whether you’re selling for profit or for loss, the end result at the start of each month should be a 20% allocation to each stock. If any of the recommended holdings change, you would follow suit.

This rebalancing is key to the strategy’s results. While the buy-and-hold strategy turned $10,000 into $110,000, rebalancing takes it to $140,000. That turns the model’s 4-to-1 outperformance compared to the Nasdaq 100 into a 5-to-1.

Finally, we got several questions about one of the holdings in the model, The Trade Desk (TTD).

On the morning of Aug. 8, TTD fell more than 38% after a bad earnings report. That happened to be the same day we published our last update on the MVO model, confirming TTD was still one of the month’s five holdings.

Two things to understand here…

This strategy is volatile. There have been and will be losing months. Volatility is often the price you often pay for outperformance, and that’s the case here.
The only trades the model makes are at the start of each month. It doesn’t react to news or earnings events.

In backtests, trading this strategy since 2018 has outperformed the Nasdaq 100 benchmark by about 5-to-1 as of the start of August.

It uses our own proprietary risk parameters and accepts wins and losses, no matter how bad they are, only at the start of a new month. That’s a feature, not a bug – it’s how the model generated the backtested performance.

The One Flat Sector of 2025 Is a Buy Today