Over the next couple of weeks, those of us who reside in the U.S.A. will be readying ourselves for the Thanksgiving holiday and the display of naked greed and mob mentality that immediately follows it; Black Friday. For those of you unfamiliar with the concept, Black Friday is the day following the holiday when, traditionally, retailers offer their best bargains to kick off the holiday shopping season. The energy markets may not have the same tradition, but this may be a good time to make a shopping list for an equivalent event.
I have suspected for some time that, at some point, oil traders would be unable to resist the temptation to see how things look when WTI once more has a 3 handle. After a dramatic fall this week that looks to be imminent. Given the power of momentum we could even trade at or below the $38ish lows reached a couple of months ago. That will have many energy investors wringing their hands, but those with a trader’s mindset will be putting together a shopping list to take advantage of the market’s own Black Friday, or whatever day of the week those levels are reached.
Let’s be clear, it is not that oil, and therefore many related stocks could not go below those levels; it is just that there is a good chance that momentum will slow and then turn somewhere around the previous lows. Proximity to those levels allows for stop losses to be set below what can reasonably be expected to be a strong support level, limiting the downside to trades with a lot of upside. That is an ideal scenario for traders who are looking for a short term bounce.
The question, then, is what should be on your list?
It is tempting, in some ways, to go for the hardest hit stocks in the sector, but even a recovery would leave oil prices low enough to pose an existential threat to some small, highly leveraged Exploration and Production (E&P) companies. The objective here is to find bargains with enormous upside and limited downside risk. Taking a chance on a company whose balance sheet indicates that bankruptcy, and therefore total loss of your investment, is a possibility just doesn’t fit that profile.
The big, U.S. based multinational companies make sense, Chevron (CVX), Exxon Mobil (XOM) and Conoco Phillips (COP) will all be on my list, but there are other, more risky plays that can also be considered. EOG Resources, which I played successfully the last time we were down here, has demonstrated the ability to still operate profitably with oil (and for that matter natural gas) at these low levels. That presumably explains why the stock has held up pretty well during this drop, but anywhere below $80 the stock looks attractive.
Recovery in the price of WTI may take longer to impact oilfield service companies as most producers have drastically cut capital expenditure estimates, but a significant rally could change that quickly and something like Anadarko (APC) below $60 looks to be cheap enough to justify the risk, even now. In fact, proximity to the lows makes it one that should probably come off of the list and be a pre-holiday purchase.
Even related energy businesses, that are not directly dependent upon the price of oil, will be dragged down with energy as a whole and should be considered for your list. Large, well managed solar companies, for example, such as First Solar (FSLR) and Canadian Solar (CSIQ) have lost ground this week and can reasonably be expected to bounce if oil does.
There are, of course, lots of other possibilities; that is why making a list is so much fun! For those who trade, however, what is most important is that you remember two things: First, the old dealing room adage that every market looks strongest just before it collapses and weakest just before it jumps. Preparing a list of stocks to buy when things look dark will keep you aware of that and make actual execution of those ideas easier. Secondly you should, as successful traders always do, keep in mind the fact that you could be wrong. Setting stops to cut for a small loss should oil keep moving downwards will leave you in a position to try again in the future. Good luck and happy shopping!