A Big Decline in Oil Causes the Market Rebound

Regarding to Seeking Alpha Editor’s Eli Hoffmann Crude oil futures closed down more than $6/barrel, the largest daily drop in 17 years. Besides longs booking profits, other factors might have been

1. Bernanke saying the U.S. economy faces significant growth risks.
2. OPEC lowered its global oil-demand growth forecast for 2008 by 70K b/d
3. And for 2009 by 100K b/d.

"It looks like oil fell to lows we saw at the end of last week and then probably triggered quite a few automatic sell-stops," Wachovia's Nathan Golz said. Today brings the weekly EIA petroleum inventories at 10:35. Forecast (Reuters): Crude -2.1M. Distillate +2M. Gasoline -0.4M. Utilization 89.2%.

Bespoke Investment wrote that the energy sector is now trading well below the bottom of its trading range, and only 5% of the stocks in it are trading above their 50-day moving averages.


So where has the rotation occurred? Healthcare. As shown, 46% of the stocks in the Healthcare sector are now above their 50-days, and the number is increasing. Unfortunately, the Energy sector now makes up a much larger slice of the market than it used to, so it might be wishful thinking for those who think a big decline in oil will cause the market to go up.


Now, let’s look at the table below. It shows amongst the oil stocks’ annualized reward to capital return.

	Annualized Return	Annualized Volatility	Reward-to- Risk Ratio	Capital Commitment
Exxon Mobil (XOM)	2.5%	26.7%	0.09	$8,482
Unhedged Valero (VLO)	-49.9%	39.5%	-1.26	$7,427
Hedged Valero (VLO+USO)	63.2%	35.9%	1.76	$6,390
United States Oil Fund (USO)	112.7%	30.9%	3.67	$5,353

Hedged Valero position combines a cash account purchase of 50 VLO shares with a margin account purchase of 100 USO shares, meeting the 50% equity requirement with cash. The return depicted reflects the resulting margin loan carried at 1.25% below prime; all other positions depicted reflect cash account purchases of 100 shares. (Source: HardAssetsInvestor.com)

Oil Index at CBOE, today, shows that in order to technical analysis oil has broken the lower band of Bollinger band. When the oil prices index is currently under the lower band, it should be considered oversold as same as W%R signed. Accordingly I expect oil prices will immediately rebound from present lows.


But I do not recommend Valero Energy (VLO) because Refining sector has been shrinking in margin and stagnant. Let’s look at the chart below. It shows even oil prices spike since mid-last year but refining margin traverses in opposite direction of oil prices.


Which one should be bought? XOM is signing that the stock is oversold, let’s look the chart below:


Related Posts :

Exxon Mobile(XOM) is Under Correction

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.