Crude oil dropped from over $107 a barrel in 2014 to under $30 a barrel in January 2016. That's a bigger plunge than it had even during the 2008 economic crisis!
This selloff was clearly overdone to the downside, and negatively affected stocks in the entire Energy sector.
But now oil is in the early stages of rebounding, and the benefits from its bounce-back are exponentially felt in energy stocks, particularly in oil services and equipment.
Many companies in this group have found a way to be profitable at low oil prices, and they now enjoy a leveraged increase in profits for each move higher in the underlying commodity.
There are several factors in place that should benefit the energy sector going forward in 2017:
1. The global economy is growing faster than expected, which leads to increased demand for oil.
2. OPEC, led by Saudi Arabia, enacted production cuts in November 2016. This was its first agreement to cut oil production in 8 years, and included large producers such as Iran, Iraq and Russia.
3. The incoming Trump administration is likely to cut regulations on the US energy sector, which should increase revenues and profits. Additionally, the overall political environment will likely be much more business-friendly, which can lead to increased merger & acquisition (M&A) activity among energy companies.
I use Exchange Traded Funds (ETFs) to benefit from the sectors that are outperforming the broad stock market.
An ETF is a basket of companies -- a basket of stocks lessens the overall risk from any individual name, and also decreases volatility overall compared to an individual stock.
You can pinpoint an ETF that is charting its own course and making gains, regardless of what the S&P 500 or the other major market indexes are doing. I do this with a tested trend momentum method, using unique charts and indicators.
I've been bullish on the Energy sector since a clear bottom was reached in early-2016. There is an ongoing big picture rebound in place among Energy stocks, after the sector had a massive selloff from mid-2014 to early-2016 -- with plenty more potential upside ahead.
Before the election, I gave Oil Services ETF (NYSE: OIH) as my top ETF selection for 2017 in our Wyatt Research ETF Special Report -- this was based on the strong price action on multiple time frame charts (Weekly and Daily), as well as relative performance compared to the broad stock market. It is up 15% since then, despite the surprise Trump victory shaking up the market picture quite a bit.
Then during the Live Trades in our ETF Sector Alerts webinar last month, I told the attendees OIH was still an excellent buy at $34, and explained why.
It has gained 3% since then, double what the market has done. That is a 36% annualized return.
And I have a further upside target on OIH of $39, which is another 14% higher from here. This is based on a retracement rally from the key high of $58 reached in 2014 and the key low of $20 hit in 2016.
In addition, I also gave webinar attendees a specific option trade idea for the anticipated bullish run in OIH -- that Call is now up 19%.
That is 6x leverage on the move in the underlying ETF, with a smaller cash outlay, using an In-The-Money option.
This is not uncommon -- my option strategy for ETF trades gives leverage of 5x to 15x, quite a bit of bang-for-the-buck.
I use In-The-Money options that have a small amount of time premium and a high Delta. This means that they act as a virtual stock substitute, for a small cash outlay and limited risk. These options can even be traded in brokerage IRA accounts!
This little-known ETF has the potential to gain 14% to 33% in the next 3 months, in my analysis.
And I'll also give you a specific option that I've selected on this ETF, which could achieve profits of 80% to 175%.
Finally, I will explain how to pick the best ETFs and what is my favorite option strategy for trading them.
I hope to see you there Wednesday!
