3 Stocks to Buy As Sector Rotation Heats Up

The S&P 500 is closing in on a record high as optimism returns to the Street. Over the past week, we’ve seen improving price action and accelerating strength beneath the surface. Sector rotation is afoot, and I’ve spotted three stocks to buy that should continue to benefit from the shift.

A glance at recent sector performance reveals several themes.

Small-caps are sizzling, banks are booming and energy is rising from the abyss. Industrials also saw massive inflows.

Each area boasts many compelling charts, and today’s selections look well-positioned to profit.

Some say that sector rotation is the lifeblood of a bull market.

The power of laggards leading while leaders lag (or otherwise take a breather) has been on full display this week.

Let’s take a closer look at three ways to capitalize on its continuation.

JPMorgan Chase (JPM)

Source: ThinkorSwim

The awakening of the banking industry is undoubtedly one of the reasons why the small-cap-laden Russell 2000 Index has awoken. But it’s actually one of the largest banks that has me licking my chops. JPMorgan Chase (NYSE:JPM) is topping off the third week of a robust rally that ushered its shares to the upper end of its two-year trading range.

And that means a breakout could be imminent. JPM stock has a history of delivering strong followthrough after weekly breakouts. And with the fourth quarter fast approaching as well as bullish undertones returning to the Street, JP Morgan should keep delivering.

Buy the Dec $120/$125 bull call spread for around $1.90.

Exxon Mobil (XOM)

Source: ThinkorSwim

Energy stocks have been laid low over the past six months, but this week finally saw big buyers enter the fray. The last three days have seen accumulation days in the Energy Sector ETF (NYSERCA:XLE). Exxon Mobil (NYSE:XOM) is rising alongside XLE, and though its intermediate- and long-term trends still point lower, the sharpness of this week’s ascent suggests more upside is in the offing.

I particularly like how this morning’s weakness was quickly bought up, confirming that buyers still lurk beneath the surface.

Exxon’s low implied volatility rank makes long premium plays compelling. Instead of going aggressive with a bull call spread purchase, I like using bull call diagonals instead. They only require a mildly bullish move and set us up to profit from time decay.

Buy the Jan $67.50 call and sell the Nov $75 call for a net debit of $4.95.

Boeing (BA)

Source: ThinkorSwim

Ever since bottoming in mid-August, Boeing (NYSE:BA) has been booming. The recovery reached a fever pitch yesterday with a high-volume 3.6% pop that jammed BA stock to a four-month high. We’re seeing some well-deserved profit-taking this morning, but with the short-term trend now pointing higher, I suspect the weakness will prove a buying opportunity.

Be aware that major resistance looms heavy at $383, so Boeing needs to clear that level before the party can really begin. But its angle of attack and the strength seen over the past month gives BA the best chance it’s had in months to turn its intermediate-trend back up.

Buy the Jan $380/$400 bull call spread for around $8.50. Your risk is $8.50, and the potential reward is $11.50.

— Tyler Craig

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Source: Investor Place