Headlines pointed to the weakness in tech stocks on Tuesday, but it was the action in oil that deserves the spotlight. After drifting in a low volatility lull for weeks, crude finally awoke, pulling energy stocks higher with it. The sharp rotation created quite the divergence in sector performance. While tech and biotech were down 1% and 2%, respectively, energy and oil services were up 6% and 8%.
Talk about a tale of two markets.
Of course, sector rotation isn’t new. It’s been a hallmark of the recovery ever since March, and it’s one of the factors causing the S&P 500‘s uptrend to remain so resilient. When a leading sector pauses, a lagging one picks up the slack. And it’s also why it’s been impossible to turn bearish.
That said, the power behind today’s energy stock boom deserves a closer look. In fact, I’m particularly bullish on the action in these three names:
So, with all of that in mind, let’s take a closer look at their charts.
Energy Stocks to Buy as Oil Surges: Chevron (CVX)
Chevron makes today’s list for two reasons. First, it’s one of the best-looking stocks in the sector. Tuesday’s 7.18% rip jammed CVX stock back above its 20-day and 50-day moving averages. Many of its peers are still below the 50-day. Second, Chevron is a large-cap boasting a more pristine balance sheet than many of the smaller companies drowning in debt.
And, although it’s well off of March’s low (57%, to be exact), CVX still offers a tasty dividend yield. At 5.65%, it’s more than three times higher than the S&P 500’s 1.83% yield.
Tuesday’s rally created a higher pivot low and horizontal resistance break, officially turning the daily trend higher. The next earnings report is scheduled for July 31 — but if the low implied volatility rank is any indication, traders aren’t all that fearful ahead of the event.
The Trade: Buy the Sept. $90/$100 bull call spread for around $3.80.
Exxon Mobil (XOM)
Exxon Mobil has lagged Chevron in recent months. Since its share price hasn’t snapped back as aggressively, its dividend yield is quite a bit higher at 7.79%. Income seekers count this as a reason to favor XOM over CVX, but it doesn’t come freely. There’s arguably more risk with Exxon.
The price chart is heating up, though. Tuesday’s climb brought the energy stock within inches of breaking through the $45 ceiling. Pushing and holding above it would also carry XOM to the high side of its 50-day moving average. Moreover, volume swelled on the session to nearly double the average on Tuesday. That said, this is the type of participation that makes an upside breakout more likely.
Here’s another impressive fact. Even though oil pared its gains into the close, energy stocks didn’t. It’s this type of relative strength that makes me more bullish.
Implied volatility is low with XOM stock options, so consider them cheap.
The Trade: If you’re willing to bet on higher prices, either purchase shares or buy the $45/$50 bull call spread for approximately $1.50.
VanEck Vectors Oil Services ETF (OIH)
Oil services stole the show, notching the highest gain (8.09%) of any liquid ETF that I follow. The average daily volume is usually around 750k. On Tuesday it soared to 2.2 million — or roughly three times the average — marking some serious accumulation.
One benefit to playing and ETF like OIH is you sidestep stock-picking altogether. That way, you don’t end up buying the one stock that sinks while the sector soars. Halliburton (NYSE:HAL) is one of the largest players in the oil services space, and it’s already reported earnings. I’m encouraged that its share price rallied on the number. If we continue to see positive responses to what was a very tough quarter for the industry, then it bodes well for bull OIH trades.
Ever since the reverse split in OIH shares, its options liquidity hasn’t been great. I’d stick with a straight stock purchase on this one. I like using the $120 support zone as a stop loss.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held bullish positions in OIH and XOM.