One way that traders manage the amount of risk they accept in the stock market is through exposure to stocks with varying degrees of volatility. During an uptrend, traders usually want to have high-volatility stocks in their portfolio since these positions are the ones likely to deliver the largest gains in the shortest amount of time.
As the general level of risk in the market increases, some traders add low-volatility positions to their portfolio since these stocks are unlikely to drop as much as the overall stock market even in a bear market. Low volatility decreases risk in a bear market, but these positions also generally lead to lower returns in a bull market.
Exxon-Mobil (NYSE: XOM) is usually considered a safe stock and options prices can be used to see that the projected volatility in this giant oil company is less than the volatility expected for the S&P 500 index.
Volatility in XOM is expected to be about half of the level seen in a market leader like Apple (NASDAQ: AAPL).
XOM is also a timely buy according to the charts.
Many traders may not realize that this stock is a market leader right now with a relative strength rank of 95, indicating that it has outperformed more than 95% of other stocks and ETFs over the past six months.
In the past six weeks, XOM has been consolidating recent gains. The stock price is now near the lower limit of that trading. The stochastics and fundamental indicators show that an upside breakout is likely.
Stochastics have become oversold and are now bullish. Since 2000, this buy signal has been seen 31 times in XOM, and 61% of those signals have been winners with the stock showing an average gain of 4% during the next two weeks. One month after this signal, the stock has been higher 71% of the time with an average gain of 6%.
The price-to-earnings (P/E) ratio and dividend yield are also shown in the daily chart above. Bollinger Bands have been added to these indicators to help identify when they are too low or too high on a relative basis. Both fundamental indicators are giving short-term buy signals now, confirming the technical trends in XOM.
In the very short term, the stochastics buy signal provides a price target of about $96, 6% above the current price of XOM. That is an initial price target, and XOM can move significantly higher.
Based on the P/E ratio, a target of $113 is reasonable within the next six months. At that price, XOM would be trading with a P/E ratio of about 12 based on trailing earnings, assuming XOM meets analysts’ expectations, and that ratio would be near the upper Bollinger Band, offering a fundamental sell signal.
The monthly chart shows that XOM has been in a trading range since 2008, and the target from that price pattern is more than $120 a share. That makes XOM an attractive long-term holding. A move toward the higher price target could be sparked by damage to the nation’s oil and gas infrastructure, the company’s earnings announcement, which is expected on Nov. 1, or the resolution of the fiscal cliff in a way that makes dividend stocks more attractive to long-term investors. XOM pays an annual dividend of $2.28 per share for a 2.5% yield.
While there are a number of reasons that XOM could rally, any of those events could also lead to a sell-off in the stock. Risk can be limited by selling if XOM closes below its 20-week moving average, which is currently at $88.31.
This trade may lack the excitement of many other positions that traders consider, but it has the potential to be held for months and could provide steady gains.
Recommended Trade Setup:
– Buy Exxon-Mobil (NYSE: XOM) at the market price
– Set stop-loss at $88.31
– Set initial price target at $96 for a potential 6% gain in one month
– Michael J. Carr
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