Oil Stocks Will Continue To Under Perform The Oil ETF

By: Chris Vermeulen Click author's name for more of his/her articles

Oil Stocks will under perform crude oil and the Oil ETF for the next severl years - but Energy Juniors will outperform both.

The Market is now setting up for a great entry point into Junior Oil Stocks. When it comes to morbid fascination, the chart takes the Cake!

The Gold and Oil Guy Oil Stock Chart

Chart 1 - Multi-Year ratio chart of Crude vs Oil Stocks

What we have here is an EXPLOSIVELY BULLISH ratio chart of West Texas Crude vs Major Oil Stock. In the technical parlance, this chart has recently broken out of a multi-year reverse Head and Shoulders pattern (or Cup & Saucer depending on your interpretation) painting a target of 0.14 at the least. Here's why the above Chart is to Significant

The Gold and Oil Guy Oil Stock Chart

Chart 2 - Dow (red) versus Oil Stocks/Crude Oil chart (blue)

Chart - 2 Superimposes the above ratio against the Dow Industials. In order to demonstrate the relationship, the ration has been reversed to show the Oil Stocks versus Crude (blue line). What is imminently clear is that when Oil Stocks have under performed against Crude Oil, the general direction of the stock market has been lower!

This is in and of itself is no secret as we have all be frustrated by the lack of progress in commodity stocks vs the underlying commodities. But what is perhaps foreboding is that Chart 1 is telling us the relative underperformance is fated to go on for much longer - probably years. And by inference the Dow will remain in an extended Secular Bear Market. Confirming what we have been saying that returns on equities would be low if not negative for the next 5-10 years!

The Highlight:

Now that we'v painted the doom and gloom, there is some light at the end of the tunnel.

Chart - 1 also shows the RSI is extended and the ratio is overbought. A pullback to the neckline (blue line) may soon begin and Oil Equities will out perform Crude -- the Dow will also rebound. We are now approaching an excellent entry point into Oil Equities.

Pleas note we do not think that Oil Stocks will show negtive performance over the next 5-10 years but we do think they will lag the Crude Oil itself. Superior returns can be captured through smaller energy explorers and producers that will benefit from market trends as well as company specific news such as promising drill results...this is the place to get set and the time is now!

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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.

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About The Author: Chris Vermeulen is a veteran trader of gold and oil who makes his methods and insights available to others via his website at The Gold and Oil Guy Vermeulen's strategy is clear and simple to learn and use. "My strategy makes your trades extremely accurate with very little downside risk," he said. He provides traders with unparalleled gold and oil trading analysis, signals and 24/7 trading email support.