5 reasons why it’s finally time to sell oil

Major oil stocks like ExxonMobil are reaching extremes on a fundamental, technical and comparative basis. It’s time to short the raw in a non-raw way.

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ExxonMobil’s huge rally (XOM) and the other big oil players seem to be burning a little too much lately. ExxonMobil (XOM) is the largest component of the Energy ETF (NYSE:XLE). It comprises more than 23% of the overall weightingso let’s use that as the poster child for the big oil companies.

Admittedly, XOM has had a major bull run over the past year. Shares of ExxonMobil are now up more than 50% so far in 2022 as they again hit new highs at $99.09.

It’s way above analysts’ average price target of $80.73. Besides the analysts, here are 5 very good reasons why XOM and other big oil stocks like Chevron (CLC) are due for a drop.

POWR Rating

Despite trading at all-time highs, XOM remains only a C – Neutral – rated stock in the POWR ratings. It also ranks near the bottom of the industry group. Not a glowing endorsement for new gains.

If not for component grade A in Momentum, ExxonMobil could most likely be a sell stock. Value and Sentiment both carry a D grade.

Once the momentum breaks, expect XOM stock to begin to decline as profit taking begins to take over.

Evaluation

The latest leg of ExxonMobil’s recent rally was largely driven by multiple expansion. The price/sales (P/S) of XOM shares now stands at almost 1.4x and is approaching the high levels of the past year. It is also well above the median of 1.08 over the past decade.

The last time XOM stock traded at 1.4x P/S was last June, which marked a significant short-term high for ExxonMobil stock. Without further multiple expansion, XOM stock could likely stagnate and begin to reverse.

Techniques

ExxonMobil came in at an overbought reading from a technical analysis perspective. The 9-day RSI is above 70. The MACD made a recent high but has started to soften. Bollinger Percent B hit over 100 but has since pulled back. The shares are trading at a steep premium to the widely followed 20-day moving average.

The previous times, all of these indicators lined up the same way, marked at the short-term top of the XOM stock.

Seasonality

XOM stock is approaching a historically difficult time. July and August were by far the two worst performing months for ExxonMobil over the past decade. Stocks lost more than 3% on average in July and August and only posted gains in one of those 10 years.

History may not repeat itself, but it rhymes to quote Mark Twain. Look for seasonality to be a strong headwind for XOM stock in the summer months.

Comparative performance

ExxonMobil has been a huge outperformer in the broader market year to date. XOM is up more than 50% during this period, with SPY falling nearly 15%. Normally, XOM and SPY tend to be quite well correlated, as seen in the first half of the chart.

However, trees do not grow forever towards the sky. Expect this massive divergence to start to converge, with XOM relatively underperforming against the broader market over the next few months.

XOM stock is also stretching against the price of crude oil. Since hitting a recent high around $125 in March, oil has fallen about 4% to close near $120. Shares of ExxonMobil, however, have risen more than 12% over the same period. XOM rose from $88 to $99 even as oil prices fell from $125 to $120.

Another reason why the XOM stock rally is coming to an end.

Trying to pick the exact top of any stock, let alone oil stocks, is an art, not a science. Plus, there’s the old market adage that stocks that trade at $90 will almost always go to $100. Given that XOM is now trading over $99, most of that advantage has already been reaped.

While it makes sense to short XOM stock, it can be costly from a margin perspective. Additionally, XOM pays a 3.6% dividend yield that you would be responsible for if you shorted the stock.

Fortunately, the options market offers a very viable buying alternative. Knowing that the implied volatility (VI) is only at 34e percentile, it means that option prices are relatively cheap. They are even cheaper compared to the actual or historical volatility (HV) of 69%.

You can define your risk in advance while having the possibility of making outsized gains. Although risk management is still a vital part of trading, it has become even more important recently.

Traders looking to short overvalued, overbought, and overpriced XOM stock may consider buying cheap put options to put the odds in your favor. Ultimately, trading is about probability, not certainty.

This is the type of trading methodology and options strategy that we use day in and day out in the POWR options portfolio.

POWR Options

What to do next?

If you’re looking for the best options trades for today’s market, you should check out our latest overview How to trade options with POWR odds. Here we show you how to consistently find the best options trades, while minimizing risk.

If this interests you and you would like to learn more about this powerful new options strategy, click below to access this timely investment overview now:

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All my wishes!

Tim Biggam

Editor, POWR Options Newsletter


XOM shares closed at $99.09 on Friday, up $1.42 (+1.45%). Year-to-date, XOM has gained 65.41%, compared to a -13.29% rise in the benchmark S&P 500 over the same period.


About the Author: Tim Biggam

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Chief Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade “Morning Trade Live” network. His primary passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of POWR Options newsletter. Learn more about Tim’s journey, as well as links to his most recent articles.

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