Thankfully, negative oil prices are now in the rear-view mirror, and crude oil is back above $32 per barrel. Headlines about dropping prices were absolutely ridiculous, as crude oil fell into the red by $37. That low was the time to go long Chevron (NYSE:CVX) stock and Exxon Mobil (NYSE:XOM).
Why? The oil trade was already under fire from environmental, social and governance (ESG) investing. BlackRock’s (NYSE:BLK) note about its responsible standards going forward temporarily sealed the public sentiment coffin. Chevron stock rebounded hard from that drubbing as its now sits 80% above recent lows. That’s more than two times better than the S&P 500’s bounce.
Today, I want to highlight the opportunity of another rally, as long as we get a little bit of luck with the novel coronavirus. For one, this rally requires that states reopen smoothly. But there are certainly a few pieces to this puzzle.
The first is incremental use in energy, especially from travel. Mobility is key, and the economy doesn’t need a setback here. Second, OPEC needs to continue along the production austerity path. There can’t be any cheating or price wars — just look at the disastrous effort from Saudi Arabia. Third, and perhaps most important, is that the stock market must bottom.
If the pieces of the puzzle all fit together, then holding Chevron stock makes sense.
Buy Chevron Stock Now, Especially on Dips
Several of my previous write-ups on Chevron stock have led to winning trades. Now, near $90, CVX shares are at a pivotal point, and those aren’t usually clear points of entry. In other words, while I like the company long term, I suspect it will dip to cheaper levels.
This zone has been contentious since 2007, so bulls and bears will fight here, creating congestion. On the way up this presents resistance, and the onus is on bulls to prevail. The first sign that the rally has life is if they can take shares above $96. Next, they must cross $100.
Investors who can’t wait for a dip can revert to options. There are relatively easy ways to trade the lunacy in the energy market, while still allowing room for error. Every dip in Chevron stock has been buyable through selling puts into the fear.
Plus, elevated levels in the CBOE Volatility Index (VIX) have created a lot of potential in premiums. On a bad day, investors can sell put premiums with a 30% safety margin. The idea is to bet on the support and company fundamentals, as opposed to hoping for a rally to profit. This is a great way to cautiously add shares.
Chevron’s Management Makes It a Solid Investment
Speaking of fundamentals, Chevron is in great shape relative to its peers. CEO Michael Wirth confidently promised to protect dividends at all cost.
Evidence of this is that Chevron cut capital expenses first to maintain its healthy cash position. It also said it has more expenses it can cut before the company would even consider touching the dividend.
This is important, because the global central banks are killing the value of money, and the Chevron yield is a magnet to the stock. There’s no fixed-income plays other than the stock market. Europe currently has negatives rate, and the Federal Reserve is keeping U.S. rates at zero. Chevron stock’s 6% yield looks golden with its relatively strong balance sheet and low odds of default.
There are no perfect entry and exit points, but investors should avoid chasing stocks that spike 4% on vague headlines. Chevron stock would benefit from more people returning to leisure and business travel, but a vaccine is still far away.
So, what should investors do with news from Moderna (NASDAQ:MRNA) and its peers? I don’t mind momentum trading, but investors should chase breakouts with specific triggers. In this case, if Chevron stock breaks through $96, it can rally another $10.
But remember, there is no rush to entry, especially if you have a longer time frame.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
