Two Sectors to Buy After the September Slump

Lou Basenese

Tuesday, October 12, 2021

The broader stock market still can’t seem to shake off the September blues.

But guess what? There’s always a bull market somewhere.

And right now, not one but two appear to be gaining momentum in the Energy and Financials sectors.

Are they both a buy though? Let’s discuss...

Slip and Stall?

After slipping 5% in September, the S&P 500 Index is struggling to regain momentum. Halfway through October, it barely rebounded 1%.

However, the same can’t be said for Energy and Financial stocks. Forget stalling out, these traditionally cyclical sectors are breaking out.

Case in point:

  • Crude oil keeps climbing. In fact, the essential commodity hit its highest level since November 2014 — and that keeps propelling the Energy sector to fresh 52-week highs, too.
  • The Financial sector hit a new 52-week high, as well, as the prospect of higher interest rates (finally) promises to boost earnings. And it’s not even close. Financials are trouncing the broader market, rising 32% this year already, roughly double the return of the S&P 500 Index.

Buying into strength is a reliable investment strategy. In this case, though, if I had to pick between the two, I’d bet on energy.

Here’s why...

Persistent Pent-Up Demand

Although it’s a foregone conclusion that the Fed is going to raise interest rates eventually, the magnitude of the rise promises to be muted. Too rapid and it promises to undercut economic growth.

As such, there’s a ceiling on the earnings boost for financial stocks.

I don’t know about you, but I don’t like to invest in limited growth. And that’s where the bet on energy comes in.

After nearly two years of lockdowns and persistent supply shortages, there’s significant pent-up demand waiting to be unleashed. So much so, it’s enough to fuel years’ worth of growth.

Adding to the upside potential in energy stocks is the fact that meeting upticks in demand isn’t simply a matter of flipping a switch to ramp up supply.

In the energy sector, it takes time to adjust to demand imbalances. That means prices climb higher and faster than anticipated when demand picks up unexpectedly, like it is now.

As you can see, the growth case for energy far exceeds that of financials. But that’s not the only thing working in this sector’s favor…

Let’s Go To the Charts

From a purely chart-based perspective, financial stocks are trading back above pre-Covid levels and well above historical highs.

In comparison, energy stocks remain about 15% below pre-Covid levels… and a compelling 30% below the highs hit in 2014, when oil prices were at similar levels.

In other words, all the good expectations appear to be priced into financial stocks, whereas energy stocks are still playing catch-up.

Buying individual energy stocks represents a compelling way to capture the upside in the sector. But it also carries more risk.

So while the wonks over at MarketWatch have singled out 32 highly-rated energy stocks with an average upside potential of 30% (see here), I prefer to put my hard-earned capital into this week’s Trend Trader Pro Trade of the Week.

It offers the same upside potential, with decidedly less risk.



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Ahead of the tape,
Lou Basenese
Lou Basenese


Tags: Oil

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