Crude oil futures rose to a new record above $143 a barrel today.
So what does this mean for investors? Well, to start with, it is creating some major PAIN for US stock investors as rising oil prices have now sent the Dow Jones Industrial Average over 20% below its peak of 14,164 last October. Today the Dow closed at 11,215. The Dow is now technically in bear market territory, defined as a decline of 20% or more.
Compare the daily charts of oil and the DJIA for the past year below:
- Today’s close is a new record.
- The price of oil has more than doubled since last September.
- Oil has been surging since March.
- The price of oil is well above its 200 day moving average of 103.39 and its 50 day moving average of 128.75. We can clearly identify that oil is in a rising trend.
- The Dow has plunged like a waterfall since May while oil has been surging.
- The Dow first showed signs of weekness in its long term trend in early January when the 50 day moving average crossed over below the 200 day moving average. At the time the Dow was trading around 13,300. The long-term declining trend hasn’t changed since.
So what is a trend follower to do?
The following funds will enable a trend follower to exploit the rising trend in oil prices:
- United States Oil Fund (USO; +54% YTD) . This fund is designed to track the movements of light, sweet crude oil.
- Energy Select Sector SPDR (XLE; +7% YTD). This funds seeks to replicate the performance of the energy sector of the S&P 500.
- Oil Service HLDRs (OIH; +14% YTD). This fund holds a basket of stocks in the oil service industry. [Note: you can only purchase HLDRs in 100 share increments]
- iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO; +27% YTD) . This fund tracks the performance of the Dow Jones U.S. Select Oil Exploration & Production Index.
- Commodity iShares (GSG; +45% YTD). This fund is a broader play on commodities, but will do well when oil prices are rising because of its 78% allocation to energy.
Trend followers should avoid US stocks as long as oil continues to rise. Just look at the charts above to see why. However, if you are not a trend follower, but a value-oriented stockpicker there are some excellent opportunities created in market environments like this. In fact, most of the great value investors I know have made there best stock purchases during bear markets. Bear markets create excellent values. Value investors will find many opportunities to buy great businesses trading at bargain prices.
[DISCLOSURE: Some clients of Freedom Financial Solutions, LLC and Adam Zuercher’s family accounts own shares of GSG.]