Since its last earnings report, Exxon Mobil (NYSE:XOM) stock is up 32%. That is great news for those long the stock, but the easy money in this bounce is ending. This is the point of today’s cautionary tale. My goal is not to discount the future prospects of such a successful company. I am merely saying that there should be better near term entry opportunities for new investors. This is not an obvious point of entry into XOM stock.
The rally did not come from improved economic conditions, because they have gotten worse. We did not get a massive surge in demand. The virus is still rampant and accelerating, thereby forcing new closures worldwide. California, for example, is the largest U.S. economy and it reverted to a complete lock-down this Sunday. This endangers 14% of the country’s economy.
We do have the promise of vaccines from Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and AstraZeneca (NASDAQ:AZN). The U.K. starts vaccinating this week, but mass deployment is still months away. The good news is that they will be effective once they reach us. The bad news is that it won’t be soon enough to justify the upside that has already happened.
XOM Stock Rally Is Too Far Advanced Here
Wall Street is notorious about pricing in potential benefits months ahead of time. In this case, even though the macroeconomic conditions have worsened, stocks have never been higher. Sentiment flipped massively positive on the prospects of relief from the scientists. We are breaking records every day and the indices cannot stop making new highs.
Yet, the so-called fear gauge the VIX remains 25% above its average. Something is wrong with this overall picture, and for now it’s a trader’s environment.
Buying long-term fundamental positions in XOM stock is risky for the next few months. I am not a perma-bear on it — quite the opposite. As proof consider that on Oct. 14, the stock was under $34 per share and I wrote about buying it. I also did this on almost every significant dip for it, and for Chevron (NYSE:CVX) as well. These are the only two investments I would consider for oil trades. They have proven time and again that they can survive through crises. March of 2020 was the mother of all tests and they still are kicking.
Through it management held its promise of defending the dividend at all costs. They cut capital expenditures severely and have kept the fat 8.5% yield. Going forward, owning Exxon stock is not a growth investment but rather one for a portfolio that seeks fixed income.
This places a bottom below these two stocks, so owning them won’t be gigantic financial mistakes. They will however have to deal with the global revolution against fossil fuels. Not too dissimilar to what happened with smoking, only we need fuel to function as a globe. The shift away from them will take decades.
The Alt Fuel Threat
It doesn’t help that this year there is also the added fuel of the EV SPAC craze. Just yesterday Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) stocks spiked 7% and 5% respectively and just to name two. Clearly, the internal combustion engine has a legitimate challenger. Having said that it has a long runway ahead of it. The doom and gloom stemming from ESG investing does not impact XOM stock in the short term.
Just like I did before, I would condone buying the shares on a small pullback maybe closer to $37.50. Chasing them up here going into $45 is going to face a lot of resistance. This was a ledge that caused a gigantic crash late August so why risk it? When they come back into it accident scenes for the first time they are likely to fade one more time. This is the process that allows the bulls the chance to reload momentum.
The goal would be to take out last week’s highs. In the process, they would draw a bullish technical pattern resembling a cup and handle. If and when that triggers, XOM stock could target $53 per share. There will be plenty of resistant lines along the way like the one at $48. Successful investors usually know exactly the time frame that suits them. In this case those looking to own the shares for the super long term can nibble here. But they have to be okay riding it down 8% to 10%. Those who are more actively trading may want to wait for that pullback.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
