The Other “Higher for Longer”
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But we’d better get used to them.
The thought that the highest inflation and interest rates in decades can go even higher… and stay there for longer… It just doesn’t compute with the low-interest-rate, low-inflation bull market that spoiled investors from 2009-2021.
But there’s a third “higher for longer.”
Most investors are not aware of it.
And understanding it could mean the difference between great pain and even greater gain.
I’m talking about oil. Yes, the liquified dinosaur bones that power the world…
Contrary to mainstream media reports, I think the hyped-up green energy transition will take longer than many expect… And that we’re in a long and strong bull market in not just oil stocks, but many other fuel commodities.
Underinvestment in the 2010s, a supply glut from the shale oil boom which killed off small oil producers, and rising demand from Asian countries are all coalescing to create this situation today.
Not to mention the war in Eastern Europe cutting off supply… and new conflicts in the Middle East threatening to make that situation worse.
(If you agree, there’s one stock that just flashed a hugely bullish catalyst that we can’t afford to ignore. I’ll share its ticker with you today.)
The recent strength in energy stocks is no anomaly. It’s the first inning of a new bull market for the gooey black stuff that will take most investors by surprise.
If you’d rather not be one of them, TradeSmith has you covered.
Let’s look through our toolkit to see what our data can tell us about the new oil bull market.
The Healthiest Market Sector
The SPDR Energy Select Sector ETF (XLE) has the best health distribution of any sector.According to TradeSmith’s proprietary market algorithms, more than 84% of the 32 stocks that make up XLE are in the Green Zone.
Take a look…
Stocks enter the Green Zone when they begin a strong uptrend and stay there until they’ve fallen halfway to their Volatility Quotient level — a quantitative level that shows you where to sell stocks before losses get worse.
The sector as a whole has been in the Green Zone for more than four months, making it a surprising and welcome shelter from the volatility that began in August. That’s great news for holders of XLE… But you can potentially do a lot better owning the best stocks within the sector.
For that, we should look for stocks that most recently entered the Green Zone. Entering the Green Zone acts as a strong buy signal. And as we enter the seasonally strong fourth quarter, buying freshly minted Green Zone stocks is a great way to make the most of the trend.
Four stocks jump to the top of the list when we sort by Health:
These four stocks, which all entered the Green Zone just four days ago, vary widely in terms of size.
Kinder Morgan (KMI) and Marathon Oil (MRO) are multibillion-dollar oil majors, while Coterra Energy (CTRA) and Helmerich & Payne (HP) fall on the micro- and smaller-cap side of the spectrum.
These four stocks are ones to watch as we enter the fourth quarter. Each has the makings of longer-term outperformers as the oil bull market takes hold.
But here’s one large-cap stock I definitely want to put on your radar for this week…
An All-Timer Oil Merger
Last week, Exxon Mobil (XOM) announced its intent to merge with Pioneer Natural Resources (PXD) in a $60 billion, all-stock deal.This merger is one of the largest in history, and the largest for XOM since Exxon and Mobil merged in 1999.
It would make for the largest oil drilling presence in the Permian Basin, a key southwestern U.S. oilfield. The company CEOs also said this merger could result in driving their cost of production down towards $35 per barrel.
With oil prices already at around $85 per barrel as I write, this represents a hugely profitable, capital-efficient business — exactly the kind of thing we should invest in during times of high inflation and high interest rates.
Should oil prices go higher as I anticipate, that just means bigger profits for one of the world’s biggest oil companies.
(Full disclosure, I own shares of XOM directly and added to my position on the recent weakness in the stock.)
I think there’s no better low-risk trade on oil prices right now than XOM. Despite being a $425 billion company, it sports a price-to-earnings ratio of just 8.7. That’s only slightly above the industry average P/E of 8.10, and roughly a third of the S&P 500’s valuation of 23.5.
XOM also pays a 3.4% dividend yield at current prices, offering the chance to build a strong position as it rises over time.
Energy is the cheapest sector in the market right now, and simultaneously presents one of the biggest growth stories out there. That’s an opportunity we rarely see… and one we should grab onto with both hands.