Market Action Proves an Old Axiom

 | Jun 28, 2013 | 10:00 AM EDT
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This week's market action seemed to prove two very old trader's axioms: 

  1. The market will do precisely what will cause the most people the most pain.
  2. Traders should always look first to buy strength and sell weakness.

Both of these axioms convince me that now is the time to load up on two oil companies: Noble Energy (NBL) and EOG Resources (EOG).

First, let's take axiom No. 1: After dropping almost 800 Dow points immediately after the Federal Open Market Committee meeting, a rash of bad announcements followed on Chinese growth and our own GDP projections. Without the steady juice of quantitative easing ready to continue to take up the liquidity slack, most traders became convinced that this selloff was the beginning of another, more serious meltdown and that the market was hardly likely to come storming back more than 500 Dow points. Were the majority of traders likely short at the bottom on Tuesday? You know that they were.

While there was volatility weakness in stocks, there has been no weakness in oil, and West Texas Intermediate prices are again threatening $100 a barrel -- all while most of the other hard and soft commodities such as copper, gold, iron and most of the grains continue to track near midterm lows. Is there a more simple principle of trading than to always buy strength and sell weakness? If that's right, now is a great time to be getting into oil stocks.

The two stocks I'm going to highlight for you today I've recommended in the past, and for good reason: They are mid-cap energy exploration-and-production stocks that don't rely upon their dividends for valuation. Dividend payers are going to be far more sensitive in our new volatile-interest-rate environment, and that's not where we'd most like to be. In addition, if their cost of recovery is good, these companies are going to be able to monetize a very high and sticky price for oil, which will translate into better share values. And finally, these stocks have barely moved at all from their very strong share prices despite last week's selloff. That's the kind of strength you want to see -- and buy.

Noble Energy is generating new production in the Colorado shale plays of the Niobrara and Wattenberg, it has a direct development license into the Cyprus and Israeli Leviathan plays, and it is investing in 11 new, state-of-the-art deep-water rigs. All of these prospects are exactly the kind of opportunities we are looking for. Despite the recent shakeout, shares have never dropped much below $60 and are now making fresh highs. I say you can buy them going up.

EOG Resources is a prime player in two of the best known and highly hyped shale plays here in the U.S.: the Eagle Ford and the Bakken. But EOG continues to drop its cost per production barrel and raise its return on capital expense every year while increasing crude production more than 30% year over year. EOG just seems to do it better than everyone else on every metric. Even with the overhyping, I think has accompanied the oil names that are exposed to Bakken and Eagle Ford. EOG is hard to dislike, and its stock barely moved down from its highs during the last washout. It's another company I really want to buy as it rallies.

Even the simplest trader axioms exist for a reason. Buying oil stocks on the back of a strong oil price is one that I want to follow, particularly now.

Time to add to positions in EOG Resources and Noble Energy.



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