For most of 2022, many people were regretting not buying old energy stocks “sooner” (i.e. before they got too high). In response to Cramer saying that people should buy the dips in oil stocks, people here were complaining that there were no dips. Well, here's a dip that people can choose to buy or pass up. This post explains why I feel that the drop in old energy stocks in the past couple of weeks has been a DIP and not a CORRECTION (as some financial reporters have been describing it).
First, I want to point out two trading events hit energy stocks in June that were easy to anticipate.
The first is options expiration week volatility after a lot of gains in the energy sector could be expected to deliver a big drop in the 3rd week of June. In fact, June is historically a red month for the Dow, which contains more cyclical stocks than, say, NASDAQ. This June, Op-ex week came early as the 3rd Friday in June 2022 was on the 17th.
Secondly, there's “End of Quarter Window Dressing”. End of quarter window dressing is a thing because institutional investors & other funds/whales have to report their holdings at the end of each quarter. This means that in the weeks or days before the end of every quarter, there are going to be a lot of pros selling the stocks they have actually been making money in and buying the stocks that they're supposed to be holding. Since the rise of ESG investing, End of Quarter Window Dressing includes the selling of deeply unpopular stocks that funds have been making money on (like dirty, bad but highly profitable oil, gas & coal stocks) and the buying of popular stocks (like tech stocks), to hold for at least a while.
You can probably guess by now where I'm going with this post. This June, the op-ex related selloff in old energy stocks, which was always going to be dramatic on account of the significant 2022 gains, began early in June, because the 3rd Friday of June was the 17th. Because of the need to dump old energy stocks before they report their holdings at end of the quarter, any institutional investors, funds and whales that pretend to adhere to ESG investing and that sold their H1 2022 energy gains before the June op-ex would continue to sit out of energy until after June 30 (the end of the quarter). Over the next couple of weeks until the end of June, any institutional investors, funds & whales who don't want to report old energy stocks in their portfolios would be persistently selling their holdings. Because they have to dump the stocks before June 30, they would continue to sell even into a falling market. Even worse, there would be little/no buying support to check the selling as the same whales would avoid buying before July 1, because otherwise they'd have to report the new holdings in their end of quarter report. Note that the reluctance to hold positions in old energy also includes oil futures. In the past couple of weeks, in particular, the Biden Administration & Biden himself, have been railing at oil companies, accusing them (falsely, IMO) of being the cause of high energy prices and making threats of actions against energy company profits. The hostile rhetoric, of course, heightens the unpopularity and stigma around old energy stocks, increasing the incentive for companies to reduce/dump oil stocks as part of their “end of quarter window dressing”.
Some people have been calling the fall of energy stocks in the latter weeks of June a “correction”. It's not, because there wasn't an overvaluation problem to correct. Most energy stocks are undervalued and the sector as a whole continues to outperform in earnings as recovery from the pandemic's travel & services recession continues. What has happened in the energy sector is a virtual fire sale of stocks that a lot of funds don't want to report holding, following a lot of profit-taking that started before mid-June options expiration after a huge run up in the first half of 2022.
I expected these pullbacks in energy stocks, and I'm staking my bets on a strong, fast rally of oil futures & old energy stocks starting in early July. I've been buying up more stocks this week.
I decided to post this because an increase in buying despite ongoing low volume among energy stocks despite ongoing supply constraints suggests others are also positioning themselves for a bounce while the low volume is consistent institutional investors, funds & whales continuing to refrain from buying before the end of June.
I'm calling the next couple of days the last best chance to buy a dip in energy stocks in the next few months.
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