This Is Why You “Never Ever Ever” Sell Your Energy Stocks | WDWL
Speakers
Summary
- Energy stocks are a critical, non-negotiable hedge against oil price spikes, as demonstrated by their outperformance during the current rapid price increase.
- An analog to the 1990 Gulf War suggests the market (S&P 500) may not bottom until after oil prices peak and stabilize; oil and energy stocks are still making new highs, indicating momentum remains.
- Exxon Mobil trades at a higher forward P/E (25x) than Nvidia (20x), highlighting divergent stories: energy offers high, "money good" dividends, while tech reinvests heavily in uncertain Gen AI outcomes.
- The S&P 500 and Nasdaq Comp are nearing statistically "oversold" levels defined as a 2 standard deviation drawdown over 50 trading days (-9.6% for SPX, -11.9% for COMP).
- Historically, buying at these 2-sigma levels has led to strong forward 50-day returns (avg. +9.6%) with high win rates (92% for SPX, 81% for COMP), provided a supportive policy response addresses the root cause.
- Current market weakness blends three historical catalysts for a -10% S&P year: recession worry (from high oil), war worry (Middle East), and policy worry (Fed potentially hiking).
- The VIX is a mechanism for markets to signal policy makers; forward returns are good after moderate spikes (27-43) but deteriorate after extreme spikes (>43), as the call-and-response mechanism can fail.
- The current crisis lacks an obvious policy off-ramp compared to pure economic shocks, as the enemy (Iran) "gets a vote," making the historical market-policy feedback loop less reliable.
- Energy and software stocks (e.g., IGV) have near-zero correlation; resolving the oil crisis may help the broad market (helping software) but is not a direct catalyst for tech.
- Institutional clients are not asking about taking energy profits, adhering to the "never sell new highs" discipline and focusing on being at least index-weight (4-5%) in the sector.
Trade Ideas
Speaker states you "never ever ever" sell energy stocks because they are your only hedge against an oil price spike, a lesson anchored in the 1990 experience. He advises being at least index weight (~4-5%). The current environment is an "all-time great oil price spike." Energy stocks are making new highs alongside oil, showing momentum. The sector was extremely underowned (~2% of S&P), and its high dividend payout offers a "money good" return versus uncertain tech reinvestment. Energy stocks are a core, non-tradeable hedge that must be held, especially during geopolitical oil shocks. The discipline is to hold through new highs. A sustained peak and reversal in oil prices, as per the 1990 analog, could end the momentum trade. A resolution to Middle East tensions could remove the crisis catalyst.
Speaker provides specific statistical levels: S&P 500 at 6,250 and Nasdaq Comp at 20,650 represent a 2 standard deviation drawdown over 50 trading days. History shows that when these indices fall to these "2-sigma" oversold levels, subsequent 50-day forward returns are strongly positive (+9.6% avg.) with high win rates (92% for SPX, 81% for COMP). These levels are logical entry points to watch for a tactical bounce, as they represent historically tradeable oversold conditions. The historical pattern requires a supportive policy response to the root cause (e.g., war, Fed policy). Without a catalyst, returns can be poor (as in 2022).
Speaker analyzes VIX forward returns based on closing levels. Moderate volatility (VIX 27-43) leads to good forward returns and win rates >50%. High volatility (VIX >43) breaks this relationship, with lower win rates and returns. The VIX acts as a market signal to policy makers. Effective "call-and-response" (e.g., Fed pivot) leads to good returns after a spike. When the signal fails (e.g., 2008), high VIX levels persist and forward returns suffer. The VIX level is a key indicator to watch for assessing whether market volatility has reached a level that typically forces a policy response and a subsequent market bottom. The current crisis (oil/geopolitical) may not have a clear policy off-ramp that the US can control unilaterally, potentially breaking the typical market-policy feedback loop even at high VIX readings.
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