Are you searching for higher returns and lower risks in the stock market? One avenue is to explore commodities. These days it is easy to buy commodities using exchange traded funds (ETFs), which that trade like stocks. Commodities also provide diversification.
From the recent lows in December, crude oil has returned about twice that of U.S. stocks. Let’s explore the issue with the help of a chart.
Chart
Please click here for an annotated chart of crude oil ETF USO, +0.60% Those with more sophistication may consider using a chart of oil futures CLK9, -0.40% Futures present a significant advantage over ETFs but aren’t suitable for most investors.
Please note the following:
• The top pane in the chart is oil ETF USO.
• The bottom pane in the chart is ETF SPY, +0.34% which represents the S&P 500 Index SPX, +0.35% Similar conclusions can be drawn by comparing crude oil with the Dow Jones Industrial Average DJIA, +0.03% Nasdaq 100 ETF QQQ, +0.54% and small-cap ETF IWM, +1.36%
• The chart shows that The Arora Report gave a buy signal on crude oil the day after Christmas, which was the low of this cycle.
• The chart shows that since the Arora buy signal, oil ETF USO has produced a return of 44.6%.
• We are still holding a partial quantity, as we’ve taken partial profits. There have been many other signals on oil to manage the position and reduce risk.
• In terms of return, crude oil has either beaten or provided comparable returns to popular stocks such as Amazon AMZN, +0.63% Apple AAPL, +0.56% Netflix NFLX, -0.22% and Google GOOG, +0.41% GOOGL, +0.31%
• The chart shows that The Arora Report gave a buy signal on the stock market on Christmas Eve. That turned out to be the low of this stock market cycle. Since then, the stock market has returned 22.7%.
• The chart shows that the resistance in the stock market is very near. This indicates higher risk.
• The chart indicates that oil can move up a significant amount before reaching major resistance. This indicates a potentially more lucrative opportunity in oil than in stocks.
• RSI (relative strength index) in oil is overbought. This indicates a high potential of a short-term pullback in crude oil.
• The RSI pattern shown on the chart is very bullish. This indicates a reasonably high probability of a higher move in crude oil after a pullback.
Jeff Reeves: Three ways for stock-market investors to play oil’s resurgence
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Libya
Libya is an oil exporter. Libya is close to a full-fledged civil war.
A controversial military commander is marching on the capital of Tripoli. Right now the capital is governed by a relatively weak government that is backed by the United Nations. If oil exports are interrupted, there is a potential of higher oil prices.
William Watts: Why energy sector stocks aren’t keeping up with soaring oil prices
Iran
The Trump administration has slapped additional sanctions on Iran. Iran is a major oil exporter that is already under sanctions. In Iran, the Revolutionary Guard plays a key role. The U.S. has declared the Revolutionary Guard a foreign terrorist organization.
If geopolitical tensions with Iran worsen, oil may go higher.
U.S.-China trade deal
If the U.S. and China strike a trade deal, as seems likely, global growth may pick up. More growth means more oil consumption.
Summer travel
Summer travel is ahead. The data are already beginning to show higher demand than expected for gasoline.
EIA data showed that, for the past week, gasoline inventories had a draw of 7.7 million barrels. API data showed a draw of 7.1 million barrels versus a draw of 2 million barrels consensus. This is bullish for crude oil.
Stocks and ETFs
Oil stocks and oil ETFs have not kept up with the move in oil. There is significant opportunity if equities were to catch up with the commodity. Please note the following:
• Among oil majors, Royal Dutch Shell RDS.A, +0.68% RDS.B, +0.71% is our favorite. RDS-B is in one of The Arora Report model portfolios. The stock has a dividend yield of 5.8%. We provide buy zones, stop zones and target zones.
• Other oil stocks to consider are Exxon Mobil XOM, -0.45% Chevron CVX, -0.04% and ConocoPhillips COP, +1.93%
• In addition to long-term investments, there are often shorter-term trading opportunities in oil stocks. For example, not long ago, The Arora Report gave a buy signal to buy Continental Recourses CLR, +0.67% when the stock fell out of bed on poor earnings. Our expectation that the stock would recover because of higher oil prices has been correct. Now there are nice gains on the position.
• Among oil-service stocks, Halliburton HAL, +0.75% is in one of The Arora Report model portfolios.
• Other oil-service stocks to consider are Baker Hughes BHGE, +0.71% Schlumberger SLB, -0.07% Patterson-Uti Energy PTEN, +1.25% and National Oilwell Varco NOV, +2.32%
• Among ETFs, oil-service ETF OIH, +0.67% is in one of The Arora Report model portfolios.
• Other oil-equity ETFs to consider are XOP, +1.47% and XLE, +0.37%
Caution
There are two important cautions:
• Oil is a volatile commodity. Experience and expert guidance are needed to invest and trade correctly.
• This stock market is controlled by the momo (momentum) crowd. The momo crowd does not favor oil equities at this time.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.