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Stocks Leading Oil Prices Higher

Commodities / Crude Oil Dec 07, 2010 - 09:36 AM GMT

By: Donald_W_Dony


Best Financial Markets Analysis ArticleThe direction of oil prices continues to remain a topic of hot debate by many analysts and economists. The key elements of global consumption rates, inventory levels, OPEC and non-OPEC supply, all play a decisive role in the long term picture of this natural resource. Yet for most investors, the path of oil can be simply found in the stock market.

Over the past eight years, the price of the world's heaviest traded commodity has been linked to the course of global equities (Chart 1). Since the beginning of the last bull market (2003) the Broad-based Dow Jones World Stock Index (DJWSI) has generally lead the price of oil through its many turns. The bond between these two different asset classes is the economy. Shorter term, both asset groups held a particularly tight correlation in 2010 (Chart 2) with global stock market movements leading the path of oil.

As the global bull market nears the mid-point of its four year duration in early 2011, higher levels in the DJWSI will be driven by the gradual recovery of the world economy. Models indicate that the current advance can be expected to continue into 2012.
The outlook for oil prices is a corresponding rise.

Bottom line: The Dow Jones World Stock Index and oil can be expected to remain in similar upward trends over the next two years. A slow economic healing is anticipated to drive the DJWSI back to the 2007 level of 300 in 2011. Oil has a matching upside target of $105 by mid-year.

investment approach: The climb in oil prices should have a positive affect on many energy stocks, ETFs and oil producing nations. Several candidates might be:

1) US Oil Fund - USO
2) iShares Dow Jones U.S. Oil Equip & Svcs - IEZ
3) Select Sector SPDR Fund - Energy Select Sector - XLE
4) iShares Dow Jones U.S. Energy - IYE
5) iShares TSX Energy - XEG
6) Claymore Oil Sands - CLO

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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