After almost 11 years of a bull market, most stocks are overvalued.
Yet most investors continue to pile into stocks, unaware that they’re paying way too much.
That’s a mistake.
After all, inflated stocks simply can’t stay that way forever.
But there’s one deeply hated sector right now that I love for us.
In fact, it’s so hated and undervalued, you can easily see it on one simple chart:
As you likely noticed, this chart of the value of each S&P 500 Index sector has one dramatic standout.
The energy sector.
Only the energy sector is below its 10-year average.
And my research tells me this is a great time to profit.
Read on to see how you can more than double your money by summer in this hated sector.
This Chart Proves Energy Is a Screaming Buy
I’ve made a lot of money over the years by looking at indicators and finding rare signals.
And today, there’s one chart that’s screaming: “Buy!”
The chart below shows earnings growth rates (the orange line) and relative value (the blue line) of all the S&P 500 sectors.
When the earnings growth line is above the valuation line, the sector is a buy.
As you can see on the far left, only two sectors are a buy right now: energy and financials.
And energy has the highest earnings growth of any sector by far.
That’s why I believe energy is a strong buy right now.
But most of Wall Street isn’t seeing this.
Why Bad News Is Actually Good News
I don’t want to sugarcoat this opportunity, though. So I’ll say, as with all trading, there’s still risk here.
There’s an abundance of bad news in energy right now.
The price of oil has dropped to only $51 a barrel. That’s 23% lower than its price 10 months ago.
Natural gas prices are down 37% in just the past three months.
And then there’s the coronavirus outbreak.
As authorities fight the spread of the virus, China’s economy is slowing.
This will suppress demand for oil and lead to even lower prices.
If the virus becomes a global pandemic, the price of oil could plummet.
However, this risk means energy stocks are dirt-cheap right now.
And that sets up a huge buying opportunity for when the sector inevitably rebounds.
Trade the Energy Sector Now for Big Gains
The Energy Select Sector SPDR Fund (NYSE: XLE) is an exchange-traded fund (ETF) that owns the major companies in the energy sector, such as Exxon Mobil and Chevron.
With an ETF, traders get exposure to many stocks and avoid the risk of picking a losing company.
You can invest in this ETF to get broad exposure to the sector. It’s fallen 11% since December on the back of bad news, which gives you a great entry point.
To manage risk, call options can be helpful.
A call option gives the buyer the right, but not the obligation, to buy the ETF at a specified price at any time before the option expires.
You won’t have to exercise the option to collect a gain. You could simply close the option with a sell order.
Options offer defined risks. You can never lose more than you paid for the option. This means risks are small in dollar terms since options usually trade for just a few hundred dollars or less.
For XLE, traders could buy August 21 $53 call options.
These options were recently trading for about $3.15. This is the right to buy one share of XLE at $53 any time before August 21. A contract for 100 shares would cost you about $315.
The option can be closed at any time prior to the expiration date.
If XLE gains 11%, as I expect it to, this option will deliver a 106% gain.
And that’s just one example of how options can boost your profits while minimizing risk.
I’m always looking for opportunities like this in my Precision Profits service.
You can learn more about my unique trading strategy by clicking here.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader