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Article originally submitted to subscribers on 21st
May 2007...
It took me by surprise!
I noticed the Amex Oil Index recently broke out to
fresh highs after moving above a 1½ year congestion zone.
The first thing I wondered was - what does this
meant for the price of Oil? Will it re-challenge its July '06 highs of $79?
And what would that mean for the stock market?
It's worth noting the relationship between Oil and
the Oil stocks is not as clean as Gold and Gold stocks.
Gold Stocks lead and the metal follows soon after in
the same direction. Not so with Oil.
Oil Stocks can diverge from the price of Oil for
long periods of time, as can be seen below when Oil Stocks moved higher
between 1992 and 1998 whilst the price of Crude hovered around $20/barrel.The
reason, Oil Stocks behave like regular stocks in that they benefit from an
increase in growth expectations, quite independent from movements in the
price of Oil.
Chart 1 - Oil Index looking overbought; Crude Oil (top)
Even though it recently broke to fresh highs, the
Amex oil Index is currently over-extended:
- The index
is nearly 40% above its 200 day moving average;
- The RSI is
above 70 in
over-bought territory;
- Based on my
Fibonacci work, the current wave that began at 406 is very close to
completion at 1400.
Compare that with Crude (top) which is only about
20% above it 200 day moving average and the internal indicators (not shown)
are not overbought.
So does a fresh break to new highs in Oil Stocks
mean Crude is about to bust out?
Maybe!
Due to the extreme divergences that can exist
between Oil Stocks and Oil, we cannot necessarily assume Crude will move
higher just because the Oil Stocks
have.
But here's an indication that it might:
Chart 2 - Gasoline vs. Crude Oil (behind)
Gasoline Prices have been on a tear lately. The main
reason is bottle necks at refineries.
But take into account that we are fast approaching driving season, hurricane
season, and never-ending geopolitical strife in the Middle East; one can be
forgiven for thinking the price of Gasoline will be heading much higher.
A move above $2.50 would clinch it from a technical
point of view. Projecting a target of $3.70. That may very well mean gas at
the pump of $5 in some areas. Ouch!!
Based on the close correlation between Gasoline and
Crude, a breakout in gasoline would surely be followed by a breakout in
Crude!
And that brings us to the stock market. What does a
breakout in Crude prices mean for the stock market?
Chart 3 - Oil Stocks : Crude Oil ratio; S&P (below)
During periods when Oil Stocks outperform Crude Oil,
the stock market is usually bullish (the above chart is rising). When
Oil outperforms the Oil stocks, the stock market does poorly as can be seen
between 2000 and 2002. In
other words, rising Oil is not necessarily bad for the stock market as long
as Oil stocks are rising.
Current Interpretation: The AMEX Oil
Index in Chart 1 looks very over extended technically whilst Crude Oil in
Chart 2 looks like it may be setting up for a run to its previous highs. Under
such conditions the Oil Stock: Crude Oil ratio would decline which as
mentioned above is not good for the stock market.
$5 Gas may very well be the consumers' nemesis. The
point where the consumer retrenches and reigns in spending. At least that's
what the market is telling us!
Implications for Gold: A rising Oil
price and a falling Stock Market would be a heady cocktail for investors. Inflation
would be undeniable and the prospect of money printing to stem a falling
market would be huge. Gold has a promising future indeed!
More commentary and stock picks follow for
subscribers...
Greg Silberman
CA(SA), CFA
greg@goldandoilstocks.com
February 15, 2007
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author only. Please conduct further research and
consult your financial advisor before making any investment/trading decision.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.
_______________________________________________________________________
This
article is intended solely for information purposes. The opinions are those
of the author only. Please conduct
further research and consult your financial advisor before making any
investment/trading decision. No responsibility can be accepted for losses
that may result as a consequence of trading on the basis of this analysis.
Information contained
herein is obtained from sources believed to be reliable, but its accuracy
cannot be guaranteed. It is not intended to constitute individual investment
advice and is not designed to meet your personal financial situation. The
opinions expressed herein are those of the author
and are subject to change without notice. The information herein may become
outdated and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
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