Star trader Chris Vermeulen reveals simple trading signal to master the stock market
Utilities and consumer staples are far from exciting sectors, but watching them closely could provide a critical stock market trading signal, according to technical trading legend, Chris Vermeulen.
Despite lower-growth profiles, utilities and consumer staples stocks come with lower-risk and more predictable cashflows and yields. They’re also sectors that are largely immune to major downtowns as they provide the necessities to life – such as food (consumer staples) and electricity (utilities).
So how can they help traders master the market?
Boring defensive sectors provide an easy trading signal
In a recent WTFinance podcast, Vermeulen revealed he monitors the performance of the utilities and consumer staples sectors for key trading signals that provide an indication into whether to go long or short the major US indexes.
Because of the sectors’ defensive attributes, they’re often considered safe havens for large institutional investors when there’s concern about the economy.
Vermeulen says when he sees money moving into these sectors, it a signal that indexes such as the NASDAQ are turning bearish.
“If money is moving into these defensive plays, they (large institutions) want to get out of the fast-moving growth and tech stocks,” he explains.
“If you know money is moving into these defensive sectors, you should be very wary and protect your positions, because a sell-off may be coming.
Likewise, if the so-called ‘boring sectors’ begin to be sold-down and underperform the broader market, then it could be time to go long the NASDAQ.
“Utilities are known to be a defensive play, no matter how bad the economy gets, people still need running water, they need electricity. So you want the stock market to be outperforming the very boring assets… consumer staples are another one.”
Trading signal triggered ahead of the COVID market crash
Vermeulen notes this simple trading signal has helped him successfully avoid market crashes in the past.
“We saw this just before COVID, we saw utilities stocks take off and outperform the stock market dramatically just a few weeks before COVID hit and everything crashed. We’ve seen this time and time again in history.”
The trader, who is the founder and chief market strategist of TheTechnicalTraders, also provided some insight into how he monitors flows into defensive sectors.
Along with share price performance, he says he watches 20-day and 50-day moving averages closely.
“I threw fundamental data out the window, I threw news out the window. If it’s going down I don’t want to own it, if it going up, I want to own it,” he said.
“Once you can get a gauge on what the big money is doing, where they’re dumping their money, you can kind of ride their coat tails knowing there’s a lot of power behind it, because when institutions start moving all into the same direction, they create trends that last months and months.”