The energy sector is daring you to buy.

Most investors will ignore this challenge out of fear, disdain, or even disgust.

You’re not alone if oil names gross you out.

Energy stocks are like a wad of neon-colored chewing gum clinging to your bleacher seat. You inadvertently make contact but instantly wish you hadn’t. (Luckily, we now all carry hand sanitizer.)

When it comes to trading, though, sometimes a little discomfort comes with the territory. Now is one of those occasions as the U.S. indexes loiter in correction territory while energy names join the new highs list.

Finally, it’s time to roll up our sleeves and get down to business after months of stalking the sector everyone likes to avoid.

So go grab a pair of gloves and a putty knife while I catch you up on all the details and why yesterday was such a big deal for energy stocks. 

How It Started…

The developing energy trade first grabbed my attention late last year. Stocks were struggling. Interest rates were rising. And the U.S. Dollar Index (DXY) was ripping.

It was an environment where the energy sector should thrive, especially considering the explosive rallies in speculative growth stocks.

The bull market was due for a rotation out of the high-flying tech names and into those less attractive areas such as beverages, healthcare, and, of course, energy.

Plus, seasonal tailwinds favor crude oil and its related stocks through mid-April.

All signs pointed to energy, and it began to rally right off the bat. The SPDR Energy Select Sector Fund (XLE) gained almost 10% through the first half of January, leaving the rest of the market in the dust.

But XLE’s strength evaporated before we were presented with a clear buy signal. Instead of a rip-roaring rally, energy and the overall market fell into a malaise.

With one trading day left in January, Technology (XLK) was the only S&P 500 sector printing negative returns.

Every other sector saw green, even staples. And Papa Dow and its components enjoyed the limelight as the anticipated rotation unfolded.

Finally, cyclical areas joined the bull market party after their Q4 no-show.

Yet crude was nowhere to be seen. Instead of rallying, it dripped toward its multi-year low of approximately $65. Crude looked as if it would never print an $80-handle again.

Just as I was aiming a towel at my computer screen, black gold stopped falling. And a week later, so did the broader market.

The wait was over.

A Bellwether Breaks Out

I hope at this point you realize a market opinion isn’t necessarily a position.

I’ve been bullish on energy stocks for three months now, but I have yet to pull the trigger on a trade.

It comes down to the signal (no signal, no trade).

In hindsight, it makes sense. Energy names have been caught up in the broad selling pressure coloring the market as most investors have scurried to the sidelines.

However, that all changed yesterday with the Exxon Mobil Corp. (XOM) breakout.

XOM completed a 3-month bullish reversal after the 14-day RSI slipped below 30 last December (its deepest oversold momentum reading since crude oil went negative).

Perhaps it took a few months, but energy is raring to go.

Last Friday, XLE finished at the top of the board. It built upon that strength yesterday as the averages continued to climb and the tech sector stuttered.

If you’ve been burned by energy stocks in the past, I get it. You only have to touch a hot stove once to learn your lesson.

But I’m talking about a quick 2-3 week swing trade, not a long-term buy-and-hold position. I bet your kitchen hands can handle it.

Now, you can stick with the safer, less volatile bellwethers (like XOM). Or, you can tango with the riskier, more lively drilling stocks. It’s up to you.

Regardless of whether you choose to play it (or how), energy names will likely provide some of the best returns in the coming weeks.