Tapping Into a New Play

Our stock pick for today is Exxon Mobil (XOM:NYSE), which finally looks like it's ready to start rallying after languishing in the doldrums most of this year.

Yesterday, we received some pretty negative news about the energy sphere, as inventories of both crude oil and refined products rose much more than expected. These developments might initially seem to be good reasons to avoid a stock like Exxon, but we think the most important news in the sector this week came from overseas: China's industrial production and retail sales surged by 16% last month, and now the Chinese government is saying its economy may grow by more than 10% in the fourth quarter. The growth story over there is real – plus, it seems to be trickling into Australia, where the employment rate has already begun to lift itself from the gutter with 24,500 jobs created last month.

We emphasize the foreign story because in the long run, that's the main arena that will drive the energy trade. Unfortunately, given the nature of the deleveraging in the U.S. economy, we fear this economy will continue to suffer problems with excess refining capacity longer than most economists fear. But stock prices look six to 12 months into the future, and they are projecting a scenario in which much of the world is humming along in a genuine expansion and crude oil prices are trading higher than the $79-per-barrel area where they are currently trading.

When oil first approached these levels in the summer of 2007, Exxon was trading in the $85-$90 range, compared to its Thursday close at $71.90. We believe that if oil prices remain at these levels or rise, the shares will make up some of that lost ground. Even if it takes some time, the low share price relative to crude oil will protect against significant downside.

Thanks to this dynamic, we're not concerned about Exxon's relatively poor numbers last quarter. It was hurt by weak refining margins, but the good news is that management scaled back its capital expenditure plans by $2 billion-$3 billion and will wait until next year before ramping up some of its new overseas production assets. This lets the company hedge against the risk that energy prices will remain lower than expected, and will keep expenses down.

Exxon's stock is also starting to wake up. For the first time since late 2007, it is in what looks like a bullish trend higher, with its 50-day moving average rising above its 200-day moving average. It also found support around a recent high at $71 and is consolidating toward the higher end of the $65-$75 dollar price range in which it has been trapped since April. Most importantly, it's been making slightly higher lows since March. All of that tells us this giant is awakening and that the investors who are looking far ahead are seeing a bright future.

We'd look to buy the April $65 calls (XOMDM) for $8.75 or less over the next three sessions and program a sell order for $1 over the entry price. Those investors who are able to watch the market more closely could target a gain closer to $2 and look to sell as the stock approaches $75.

Regarding our other holdings, we're comfortable with the current positions, although we continue to advise readers to get ready to unload the Goldman Sachs (GS:NYSE) December $165 calls (GPYLM), the Alcoa (AA:NYSE) January $9 calls (AAAK) and the Cisco Systems (CSCO:Nasdaq) January $20 calls (CYQAD) if the market takes a tumble, because they'll probably follow the broader indices more closely.

We hope everyone has a great day of trading and a terrific weekend.

Regards,

Pete Najarian

Send email to pete.najarian@thestreet.com

DISCLOSURE: At the time of publication, Pete Najarian held no positions in stocks mentioned.