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Why Exxon Stock Is Finally Looking Like a Short

  • ExxonMobil (XOM) is back at historically rich valuations
  • Shares of XOM stock are overbought on a technical and comparartive basis
  • Buying cheap puts to position to profit from a pullback
XOM stock - Why Exxon Stock Is Finally Looking Like a Short

Source: Jonathan Weiss / Shutterstock.com

Exxon Mobil (NYSE:XOM) stock is fast approaching all-time highs as oil prices seem to rise on a daily basis. Calls for oil going to $200 or even $300 per barrel abound. Of course, the same fears were raised in 2008 which was the last time oil prices spiked this high. Those fears ultimately proved to be unfounded as oil never even hit $150.

Those fears are also being reflected in the price of Exxon Mobil stock and the valuations as well.

ExxonMobil now carries a P/S (Price/Sales) ratio of 1.45x. This marks the highest P/S multiple since last June which marked a significant short-term top in XOM stock. It is also well above the median P/S ratio of 1.08x over the past decade. The tailwind of the multiple expansion that has helped fuel XOM higher will likely now become a headwind as valuations start to contract.

XOM Exxon Mobil $104.28

Technical Take

XOM stock is at historically overbought levels. 9-day RSI is back above 80. MACD is nearing the loftiest levels of the past year. Bollinger Percent B is now over 100 again. Shares are trading at a massive 10% premium to the widely followed 20-day moving average.

Source: thinkorswim® platform from TD Ameritrade

Previous times all these indicators aligned in a similar fashion coincided with a top in XOM stock followed by a pullback to the 20-day moving average. Look for the same to happen again over the coming weeks.

Comparative Contrasts

No doubt ExxonMobil stock has been one of the bright spots in the S&P 500 so far in 2022. Shares are now up just more than 70% to start the year versus a nearly 13% drop for the S&P 500 (SPY). Normally XOM and SPY tend to be much more correlated.

Source: StockCharts.com

This divergence is now getting to an extreme. Expect XOM stock to be a relative underperformer to the overall market over the next several months to close that performance gap.

ExxonMobil is also getting ahead of itself versus the price of crude. Normally, oil prices and XOM stock tend to move together. This makes sense given that XOM is a major oil producer. Lately that relationship has broken down.

Oil prices have fallen just over 2% from the highs near $125 on March 8. XOM stock has actually risen significantly with oil falling since then, tacking on over 15 points, or 17%, in that same time frame. At some point either oil will need to jump sharply or ExxonMobil shares fall significantly to close that divergence gap.

Seasonality should begin to weigh heavily on XOM stock as well. July and August have been the worst two months for ExxonMobil over the past decade. July has seen gains only once in the prior decade with an average loss of 3.1%. August is even slightly worse with an average loss of 3.2% and also shows only one year of positive gains in the past ten. If history holds, XOM stock should start to struggle once again.

How To Trade It Now

Shorting XOM stock can be both risky and expensive. Shorting 100 shares would tie up over $50 per share in margin requirement. Plus anyone who shorts the stock and holds it to ex-dividend date is liable for the rather healthy 88 cents quarterly dividend that the company pays.

Luckily the options market provides a very viable alternative – buying puts.

Implied volatility (IV) is now at just the 32nd percentile, meaning option prices are a lot cheaper than average. This favors long option strategies when constructing trades. So buying at-the-money puts to position to profit from a pullback makes probabilistic sense.

Traders looking to take a short position in XOM stock may want to consider buying the September $100 puts for about $6.00. This equates to $600 per each put purchased. These puts have a negative 40 delta so each put bought would be equivalent to shorting 40 shares of XOM stock.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2022/06/why-exxon-stock-is-finally-looking-like-a-short/.

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