Exxon Mobil (XOM) is an interesting example of what we can see
The following pictures are NOT what you may likely be used to seeing in investment reports. They are different. Please do not jump to conclusions about what they show.
Figure 1 is NOT a conventional backward-in-time-looking "technical price chart." Instead, it is a two-year weekly history of forward-looking price range forecasts made by well-informed, experienced market professionals. Arguably, as a community they are the best resourced players in the game, with thousands of employed world-wide local information collectors and other thousands of in-house, fundamental value-comparison researchers.
(used with permission)
The vertical lines of Figure 1 span the range of price implied to be likely, in coming weeks and months, by the actions of Market-Makers [MMs] as they commit firm capital required to be put at risk. Their commitments are needed to balance buyers and sellers when "filling" client block trade orders from big-money-fund portfolio managers.
They won't make such commitments unless they can favorably hedge away the potential price risks they see involved. What they will pay, and what the price-change protection insurance sellers will demand in derivatives markets tells just how far negotiators on both sides of those trades think prices are likely to run during the near-future lives of the derivatives contracts.
The implications of these actions have been known to sometimes vary significantly from forecast statements made by the "research" departments of the same firms.
The vertical forecast lines are split into upside and downside prospects by the heavy-dot end-of-day market quote for the issue on the day of the forecast. A measure of the imbalance between up and down possible price change implications is the Range Index [RI], which tells what percent of the whole forecast range lies to the downside. Here for Exxon Mobil Corporation, the RI is 25, indicating about 3 times as much upside in prospect as downside.
The "thumbnail" picture at the bottom of Figure 1 displays where today's RI relates to the RI experiences of the subject over the past 5 years. Positions to the left of the distribution's peak are favorable, to the right may be not so. For XOM the outlook is encouraging because to get to higher RIs will likely require higher prices than what exists at present. Let's see how likely that may be.
The row of data between the two pictures of Figure 1 tells of the prior experiences of all RI forecasts for this stock in the past 5 years like the one seen at this point in time. We use the RI to see how well the MMs' prior forecasts have worked out when a simple, practical portfolio management discipline is uniformly applied to all investment candidates at all times.
The acronym for that Time-Efficient Risk-Management Discipline is TERMD. It sets as a price sell-target the top of a price range forecast held likely to occur within a time horizon that can be credibly forecast. When the target is reached, the position is closed and the realized proceeds are reinvested, in their entirety into the then current best available candidate. For our purposes, the forecasts used come from the MM hedging actions, with position costs of the price at the end of the market day following the forecast. The forecast horizon used is 3 months (91 calendar days or 63 market days), when a still-open position is closed, it is all to be reinvested, regardless of gain or loss.
For XOM there have been 199 prior instances of RIs at 25 out of its 1261 market days in the past 5 years. Profits were there to be earned in less than half (44%) of those experiences. After deducting the losses of the unprofitable positions, the return on all 204 was -0.4%. Those net payoffs are markedly lower than the +7.9% upside price change expectations in the current forecast. Disappointing, but not discouraging if there is a belief that crude oil prices will actually rise from here (the low-$50s per barrel).
Since few forecast positions reached targets before 63 full market days, the average holding period on all 199 was 56 market days. That compounds the -0.4% payoffs to an annual [CAGR] rate of -2%. Pretty bad, but there can be no guarantee of a XOM position taken now producing profit at a -2% CAGR. Still, the 199 RI forecasts is an ample sample size, providing desirable time diversification.
Risk-Reward tradeoff comparisons
With XOM as a guideline, let's look in Figure 2 at how the trade-off between its upside forecast prospect of +7.9% and a typical worst-case price drawdown experience of -6.1% (while pursuing the upside prospects of such RI forecasts) compares with other integrated oil company stocks. Price drawdowns are in comparison to a position entry cost price at the end of the day after the forecast.
(used with permission)
Upside price rewards come from the behavioral analysis (of what to do right, not of errors) by Market-Makers [MMs] as they protect their at-risk capital from possible damaging future price moves. Their potential reward (best upside likely price change) forecasts are measured by the green horizontal scale.
The risk dimension is of actual-experience price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.
Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line.
Best reward-to-risk tradeoffs are to be found at the frontier of alternatives down and to the right. In this case XOM is at location  and for comparison, Chevron Corporation (CVX). (CVX) is at , not part of that frontier, which is represented best by Conoco Phillips (COP) at , Suncor Energy (SU) at  and Devon Energy (DVN) at .
Let's look at the details of PetroChina (PTR) at  in Figure 2 as a contrast to XOM as candidates for investment.
Here PTR hedging suggests a possibility (for a short position to be protected from) of only as much upside price change as +7.9%, the Sell Target Potential. But in 117 prior forecasts at similar Range Indexes of 28, only 5 of each 8 (62%) produced a profit. The overall resulting average price gain was +1.1%, not nearly as good as the forecast target potential of +7.9%.
That contrast earned an encouraging Cred.(ibility) Ratio for PTR of 0.1. XOM's equivalent at present is a negative -0.3.
By the way, looking at oil stocks in the last 5 years is focusing on an industry with major economic shifts in extractive technology that have reduced the benchmark commodity prices by half. Changes that have enormously upset the supply~demand balance, and created international political shifts world-wide.
This article looks at near-term (next few months) stock price change potentials and is not forecasting either near or more distant crude oil commodity prices. It does recognize the importance of Crude oil prices to all business activities in the oil patch, however, as they are being seen at the present by the financial community.
The achieved price gains by PTR of +1.1% in 43-day average holding periods produces a CAGR of +6%. The parallel CAGR for XOM is a less-competitive -2%.
The point here is that the forecast returns in Figure 2 may need further analysis. A comparison among alternative investment candidates is needed of how well each has recovered from price drawdowns. Similar comparisons between candidates of their accomplished price gains instead of their forecast prospects. That is supplied in Figure 4, where the size of accomplished payoff price returns on the vertical scale are matched with the Odds of a position being profitable on the horizontal scale.
Comparing profitability odds and payoff sizes
As in Figure 2, more desirable results are down and to the right, and less attractive ones are in the upper left direction. Locations in the green area are most desirable.
(used with permission)
Here the SPDR S&P500 Index ETF (SPY) at  is offered as an indication of a market average norm. Figure 4's scales are set to include outstanding performances, so none of these issues appear attractive, in comparison to the market average.
(Apologies for securities with WinOdds less than 80 appearing in the white Payoffs vertical scale space at the left of Figure 4. Additionally, those with negative payoffs are at location  in its upper left corner.)
Details of prior results from current MM price range forecasts for the Reward~Risk frontier stocks in Figure 2 are shown in Figure 5 for DVN, (at  in Fig.2), in Figure 6 for SU (at  in Fig.2) and in Figure 7 for COP.
(used with permission)
DVN scores better than most integrated oils with an upside price change forecast of +17.9% and achieved net payoffs of +2.8%. Its typical worst price drawdown risk exposures of -8.8% have been recovered from in over 7 out of every 10 experiences. Some 254 prior forecasts at RIs of 36 averaged 39-day holding periods under the TERMD discipline to compound the +2.8% net price gain captures to a CAGR of +16%.
(used with permission)
SU scores an upside price change forecast of +14% and achieved net payoffs of +1.9%. It's typical worst price drawdown risk exposures of -7.0% have been recovered from in some 5 out of every 8 experiences. Some 226 prior forecasts at RIs of 36 averaged 47-day holding periods under the TERMD discipline to compound the +1.9% net price gain captures to a CAGR of +11%.
(used with permission)
COP hedging by MMs produces a +9.2% upside prospect in a price range with nearly as much upside as downside, indicated by a RI of 46. Recoveries from typical worst-case price drawdowns of -5.7% have been achieved in fewer than 50 of the 75 prior RIs at 46. Net of the losses, gains of less than 1% on average compounded into CAGRs of +6%, due to 39 market-day average holding periods.
None of these stocks are competitive with the best wealth-building alternative candidates we see on a regular daily basis. It is important to understand how badly their prospects fall short of the returns being presented by other quality securities. Here are the average details of today's 20 top-ranked securities out of a population of 2,649.
We provide these several dimensions for consideration because different investors have different intensity of preference for their emphasis. It is the reader's job to conclude what stock or ETF choices best favor his/her circumstances.
Subscribers to blockdesk.com and/or the Market-Maker Intelligence Lists of top20 ranked stocks and ETFs have access to similar block trader forecast [btf] reports for all above mentioned issues in figures 2 and 4.
A record of the performance of over 7,900 top20 named issues on MM Intelligence lists since 12/31/2015 is displayed on our blog, in comparison with the ETF of SPDR S&P 500 (SPY) during the same time period. It shows a persistent, dominant, out-performance of wealth accumulation by MM forecasts managed under TERMD compared to a buy&hold of SPY, or even a MM-timed active investment in SPY. Please check it out, the performance superiority is far greater (in equities) than any academics encounter..
Among the dozen or more Integrated Oil Company stocks compared here DVN may offer the most attractive prospects for wealth-building investors, but it is far short of hundreds of other vehicles better-suited to adding to a portfolio's value.
Please remember this is a near-term evaluation, suggesting CAGR price gain opportunities far above multi-year trendline price growth street estimates for the group. What may appear as more attractive in a few months, providing future price-compounding capital growth opportunities may be very different from the then less attractively-priced current investment competitors. An updating follow-up visit to the group is advisable.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.