Following the claim made last week in Digest Issue 37 "Rotating Bull Returns [Charts]" that the energy sector may be in the process of turning higher here are 3 energy ideas to consider: Halliburton (HAL), Chevron (CVX), SPDR S&P Oil & Gas Exploration & Production ETF (XOP). First brief S&P 500 Index and VIX updates.

S&P 500 Index (SPX) 2502.22 added another 1.99 points or +.08% for the week making new closing highs every day until Thursday just like the week before. However, both cyclical and seasonal forces suggest a pull back toward the 50-day Moving Average may be underway as rotation out of large capitalization tech favorites into laggards like energy gains momentum.

CBOE Volatility Index® (VIX) 9.59 eased .58 points or -5.70% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM, added .29 points or +4.49% using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With 17 trading days until October expiration, the day-weighted premium between October and November allocated 85 % to October and 15% to November for a 31.18% premium, beyond the upper boundary of the green zone suggesting the VIX declined more than the front month futures and perhaps too far into oversold territory since premiums above 30% are as unsustainable as they are below zero.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

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Rotation into Oil & Gas

WTI Crude Oil (CL) 50.66, basis November futures gained another .22 last week.

Based on trading above the downward sloping trendline, with a sizable Brent premium to WTI, along with Brent futures moving into backwardation, last week the case was made for the energy sector turning higher despite this being the time of the year when it typically declines.

Since stocks in the energy sector normally lead the commodity here is our Top 5 Stock Sentiment Ranker results for the Oil & Gas sector.

Halliburton (HAL ) 44.25, number one with the Sentiment Analysis details.

Includes Exponential Moving Average and Relative Strength Charts. While the Exponential Moving Average chart does not show a downward sloping trendline it's not hard to visualize that it is now closing above the downtrend as well as above both moving averages that are shown.

Also, includes Chaikin Money Flow that has turned very positive.

Along with correaltion and options data showing the Implied Volatility Index Mean for the 30- day term at 21.66%, near the bottom of the 52 week range at .02. Adjusting the 30-day Historical Volatility of 18.71% to the range method at 18.23% calculates the IV/HV ratio of 1.19, so options are inexpensive relative to the recent movement of the stock.

Chevron (CVX ) 117.29, number two ranked has an Implied Volatility Index Mean of 13.25 with a 30-day range Historical Volatility of 11.47% making the IV/HV ratio of 1.16 meaning options are also inexpensive.

Since both Halliburton and Chevron are scheduled to report earnings in the last week of October, implied volatility will likely rise into their reporting dates.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) 33.04 reduces the affect of and unexpected earnings surprises. With an Implied Volatility Index Mean of 23.88%, also near the bottom of the 52 week range at .07. With a 30- day Historical Volatility of 20.26%, using the range method, the IV/HV ratio is 1.18, also inexpensive relative to the recent movement of the ETF. In addition, XOP has about 7 times the options volume at 173,795 contracts compared to HAL and CVX with attractive bid/ask spreads.

On the assumption crude oil prices are turning higher even if just modestly oil and gas companies appear to be the beneficiaries of rotation out of the favorite tech leaders. Presuming the rotation continues, despite this being an unfavorable time of the year for the sector, consider long November or December call spreads while options remain relatively inexpensive. For now go with the rotation flow. However, should crude oil prices falter don't hesitate to close positions quickly since this is seasonally the weak period.

Summary

Sector rotation out of the previous tech favorites into laggards such as oil and gas appears to be underway despite seasonal headwinds against the sector. While the very nature of rotation requires close monitoring it will likely continue as the S&P 500 Index pulls back toward its 50-day moving average.