With the S&P 500 hitting an all-time high, stocks have been stealing the headlines. But behind the scenes, there is a market that is just as hot. 

And when this market accelerates as it did in early 2008, prices can easily jump 50% in a few months. Take a look at the big move below.

This is a chart of West Texas Intermediate [WTI] crude oil prices. Crude oil just logged its best five-day run in eight months, trading near the key $100 level.

That bullish movement has been driven by big institutional investors sending capital into commodities, with hedge and fund managers increasing their net long positions across a basket of 18 U.S. futures and options markets by 10% in the week ended March 26. That mirrors a larger trend, with bets on commodities up 67% in the past three weeks, the biggest gain since May 2009. And one of the biggest destinations of those bets is into crude.

That’s because peak consumption in the spring and summer is right around the corner, and the smart money is betting prices will move higher. With monetary stimulation from the central banks of the world fueling potential inflation, the stage is set for crude to make another run to its all-time high above $147 per barrel this summer.

Buying a crude-oil exchange-traded fund such as Powershares DB Oil (NYSE: DBO) is a good way to profit from rising oil prices, as demonstrated in the chart above. But there’s a better way: Buyshares in exploration and production (E&P) companies that own and extract the commodity from the ground. [These are the special kinds of stocks and opportunities that my colleague Nathan Slaughter looks for in his Junior Resource Advisor newsletter.]

Exploration companies provide unparalleled leverage to crude prices, reaping huge gains in sales andearnings when prices surge higher.

But the group has been under pressure in the past two years after energy stocks collapsed in the spring of 2011. That has E&P stocks trading at record low valuations and carrying big-time dividend yields.

Here are seven E&P stocks with yields up to 9%.

From this group, I like Breitburn Energy Partners (Nasdaq: BBEP)because of its outsized dividend yield, and Atlas Resource Partners (NYSE: ARP) because of its earnings power.

Breitburn Energy Partners
Breitburn explores and produces oil in Texas, California, Wyoming, Indiana and Kentucky. The company also explores for natural gas, providing additional leverage to another growing segment of the global energy market.

Despite the S&P 500’s big gains in the past two years, Breitburn’s shares are down 7% during the same period. No doubt that has a lot to do with crude trading mostly sideways and natural gas falling sharply. But with both markets on the mend, higher crude and gas prices would be a boon to the company.

Analysts are looking for earnings per share [EPS] of 86 cents in 2013 and 96 cents in 2014. That has shares trading with a forward price-to-earnings (P/E) ratio of 23, a slight premium to its peer average of 19. But when you add in the dividend yield of 9.4%, Breitburn offers strong growth and income.

Atlas Resource Partners
Atlas Resource Partners explores and produces with interests in some of the biggest and most lucrative energy properties in the country. That includes assets in the Barnett and Marcellus shale plays, two of the largest shale formations in the country. Atlas has also been struggling, with shares down 17% in the past year.

But with analysts expecting EPS of $1.15 in 2013 and $1.61 in 2014, that has sweetened the valuation picture considerably. As it stands, Atlas’s forward P/E of 21 is a sharp discount to its 10-year average of 33. And when you throw in a hefty dividend yield of 8%, there is compelling value and income to be had.

Risks to Consider: Oil E&P stocks are some of the most sensitive energy stocks in the market. Any signs of slower GDP growth or weakness in the global economy will weigh on the group heavily.

Crude just logged its best five-day run in eight months. That’s a bullish signal heading into spring and summer, which are peak seasons for consumption. These seven E&P stocks stand to benefit the most from higher crude prices, but the group still trades at historically low valuations after falling sharply in the past two years. My favorites are Breitburn Energy Partners because of its outsize dividend yield and Atlas Resource Partners because of its bullish earnings growth projection.

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The regular readers of this newsletter will know that I have been bullish on the markets for some time, but that is changing. The S&P 500 reached an all time intra-day high on April 10th, but the rally may not last long and could possibly top out at the end of April or the beginning of May, as it has done in the last two years.

We are in the process of completing a three-peat – a strong market in the first four months of the year with the defensive sectors outperforming the cyclical sectors, for a third year in a row. We all know what happened in the last two summers. It has been interesting to note how many commentators have been on TV talking about how the defensive sectors have been outperforming the cyclicals and that this is bearish for the markets. I have discussed this phenomenon over the last three years, in the beginning part of each year. There is no question that it general, when the defensive sectors outperform, the market is becoming more conservative. This is true at any time of the year.

Seasonal analysis not only provides insight into the sectors of the market that are poised to outperform, but it also provides valuable information on the health of the market. When sectors of the market do not perform as expected, by following their seasonal trends, astute seasonal investors can use the information to determine if the market is poised for a rally, or setting up for a correction. In my April market video I discuss the phenomenon of the defensive sectors outperforming at the beginning of the year and state that is a concern and indicates a possible market correction, but we cannot tell if the correction is going to be next week or in the near future. In other words, defensive sector outperformance cannot be used as a timing indicator to make a portfolio decision. Nevertheless, it is valuable in raising concern to possible unfolding events.

Over the last two years and this year, at the beginning of the year, the defensive sectors have outperformed when the cyclical sectors typically outperform. So what is the big deal? The market is telling investors that the big money is “scared” as it is seeking safety at a time of the year when it would typically be chasing beta. The market cannot proceed higher over the long-term on the back of the defensive sectors alone. One of two events must happen: either a rotation out of the defensive sectors into the cyclical sectors must take place, which will keep the market moving higher, or the market must correct.

So what should we expect? How do the seasonal trends help us at this point? Currently, the cyclicals have had a couple of days of strong performance, outperforming the defensive sectors. This is very typical in the month of April (see the Thackray Sector Thermometer, Thackray’s 2013 Investor’s Guide, page 42). It is very possible that we will see a continuation of this trend in the next couple of weeks, which would not be out of the ordinary. If the defensive sectors gain control once again at this time, it would be indicating that a correction is close at hand. If the cyclicals continue to outperform, it would be a signal that the market still has a bit of life left and might rally into May.

Should we expect a massive rotation from the defensive sectors to the cyclical sectors over the next few months – NO. Although anything is possible, the seasonal trends do not support a sustained rotation into the cyclical sectors past the first week in May. In fact, if the cyclicals do outperform in the next few weeks, when they start to roll over, it will probably be a sign that the market is setting up for a correction. Investors beware.