Trading Chesapeake Energy Stock Is Like Playing With Fire

One of the surprising benefits of the otherwise awful novel coronavirus pandemic is the influx of young people interested in investing. By starting early, you can get a solid start to financial independence. At the same time, we’re seeing a dramatic rise in irrationality. Take for instance bankrupt Chesapeake Energy (OTCMKTS:CHKAQ). The company formerly known by CHK stock continues to attract buyers despite a catastrophic collapse this year.

Image of an internet browser with Chesapeake Energy's (CHK) homepage on it. The Chesapeake Energy logo on the page is amplified by a magnifying glass.
Source: Casimiro PT /

Why? Simply, fresh enthusiasm without traditional guidance, education and support has led to extreme irrationality in the markets. Under ordinary circumstances, there’s no way that anyone would touch CHK stock. From both a technical and fundamental perspective, Chesapeake Energy is toxic.

Laden with debt and struggling for relevance in an increasingly irrelevant industry, Chesapeake would scare all but hardened speculators.

Yet CHK stock continues to march onward, as if enjoying a second life following the evaporation of most of its market value. In late July, the Wall Street Journal explored the phenomenon of young or rookie day traders venturing into the stock market, possibly fishing out a career. For many, an escape from boredom is a catalyst, and platforms like Robinhood don’t necessarily mitigate this sentiment.

With its intuitive and attractive platform, it’s easy for anyone to download the Robinhood app and realize their Gordon Gekko fantasies. And “cheap” stocks like Chesapeake attract these freshmen day traders because of their volatility. Simply, it’s easier to make money off an idea like Hertz Global (NYSE:HTZ).

But it’s also easy to lose money. Slowly but surely, these newcomers will realize this. When that happens, you’ll want to stay far away from the bloodbath.

CHK Stock Is Hampered by a Basic Math Problem

Of course, no one knows for sure when this bubble of extreme enthusiasm will burst. Until then, CHK stock will continue pinging all kinds of large percentages thanks to the law of small numbers.

And let’s acknowledge the psychological temptation inherent in these flavor-of-the-week penny stocks. When you hear your buddies brag about how much they made just by playing with their phone, you start to fear missing out.

But as difficult as it may be, you’ll want to avoid this rabbit hole. If nothing else, do yourself a favor and block out all news related to CHK stock. It’s just not worth the risk of temptation.

As I briefly mentioned above, the fundamental case for CHK stock is busted. In order for these downtrodden energy companies to move higher, oil prices must appreciate. But since the beginning of July, benchmark oil indices have been largely moribund. This market needs a radical paradigm shift to gain credibility.

Obviously, that only happens with a rise in demand. However, we’re just not getting the improvement that we need to save a name like CHK stock.

Automotive traffic levels year-over-year comparison
Click to Enlarge
Source: Chart by Matt McCall Research Team

According to TomTom’s travel index, automotive traffic in major U.S. cities is down roughly two-thirds from year-ago levels. For instance, San Francisco is down 66%, Los Angeles is off 61% and Seattle is behind by 58%. New York is an outlier, but even then, traffic levels there are down 42%.

We need to see these numbers move higher before we can justify heavy bets on oil stocks. Eventually, society will return to some semblance of normal. But that’s no guarantee that Chesapeake specifically will recover. Right now, there are too many players and not enough seats.

Oil Faces Disruption

I wouldn’t be so bearish on CHK stock if its financials were stable and the underlying oil market offered long-term relevance. Unfortunately, neither are true, necessitating my pessimistic outlook.

Even for oil stocks that aren’t battered like Chesapeake, I would be careful. As you know, electric vehicle companies have dominated headlines this year, especially Tesla (NASDAQ:TSLA).

With the shutdowns, Americans have had time to consider the benefits of EVs. Mainly, I believe they are very fond of the lesser maintenance requirements due to fewer moving parts.

Therefore, even with a recovery, more consumers will start considering shifting to EVs. While that wouldn’t spell the end of the big oil companies, it would cast a dark cloud over Chesapeake Energy.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities. 

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