The rollover in energy stocks accelerated last week. Led by a nasty spill in crude, a broad swath of oil companies fell to new multi-month lows. We find ourselves in a treacherous stretch that has tested the patience of shareholders. While the rest of the market continues to hold up relatively well, the energy sector has given back almost all of its post-March gains.
It’s never fun seeing your investments sink like a stone. But it’s particularly alarming when they’re doing so while the broader market is rising. Many oil companies remain laden with debt and in need of higher crude prices to turn a profit. For the past four months, oil has been stuck near $40. While it’s better than hovering in the teens, it’s still not high enough to allow players in the space to return to the profits of yesteryear.
Here are three of the most bearish looking charts in the industry:
Let’s break down the ugliness in energy stocks and identify the best options trades.
Troubled Energy Stocks: Exxon Mobil (XOM)
Exxon Mobil’s mouth-watering dividend yield could be the ultimate siren song. At 10%, it beckons to the income-starved investor like a juicy, delicious steak. But there are two problems that you have to wrestle with.
First, Exxon just suffered two consecutive quarterly losses. I’m no mathematician, but this is a trend that can’t continue while still allowing the oil behemoth to pay out billions in dividends. Something has to give. Either they cut the dividend or earnings make a quick comeback.
Second, what good is a 10% dividend yield if the stock falls 30%? You’re still down money. Until the trajectory of Exxon’s price trend changes, I think buying for the cash flow is dangerous. If you think we could retest the March low of $30, then here’s how to play it.
The Trade: Buy the Nov $32.50/$30 bear put spread for around 85 cents.
Although the Halliburton rollover hasn’t been as dramatic as the one in XOM stock, the trend has turned. Last month’s break of the 50-day moving average killed the uptrend. Since then, we’ve seen a groundswell in distribution as institutions have leaned heavily on the sell button.
HAL stock entered Friday extremely oversold, and we finally saw some short-covering spark a relief rally. This morning’s 3% rally adds to the gains, but it’s foolish to trust the run. We’re in a downtrend, after all. And that means traders are in the mode of selling rallies, not buying them.
Until we break back above old resistance pivots and falling moving averages, I see no reason to go long. Instead, wait for the run to exhaust itself, then pounce with put spreads.
The Trade: Buy the Nov $12/$9 bear put for around $1.
Wait until HAL stock breaks a previous day’s low to pull the trigger.
Valero rounds out this list of energy stocks to sell. We’ve seen insane volatility throughout 2020 in the petroleum refiner. The post-March rebound has almost entirely unraveled since being rejected at the falling 200-day moving average.
Last month’s volume patterns are particularly problematic. We saw a handful of volume spikes during down days, suggesting this was not a small-fry led exodus. Every rally has been summarily rejected since June. Rather than guessing the Friday-Monday bounce will be different, I recommend preparing for more downside.
The trade idea is the same as the other two energy stocks listed above. Wait for the rally in VLO stock to lose steam by seeing its price break a previous bar’s low. Then buy put spreads.
The Trade: Buy the Nov $40/$35 bear put for around $1.70.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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