MILLENNIUM WEALTH STRATEGY: Oil Stocks Lagging the Market

Although the stock market is making new highs daily, and crude oil continues to trade near the top of its recent range and near the 52 week high, I have been noticing many oil stocks that are displaying relative weakness. One would expect, under normal circumstances, that when crude oil and the stock indexes are strong, the oil stocks would also be showing strength. In fact on relative strength basis we have recently seen a break down of the Dorsey Wright relative strength indicator which compares the strength of the oil sector to the overall market. Dorsey Wright goes on to say ,
"This is perhaps more notable in the sense that it is the first RS (relative strength) sell signal from the oil index since we began tracking it (more than 10 years ago)."
The oil sector relative strength signal had been on a buy signal since 8/13/2002 and here are the comparable returns

Return 8/13/2002 through 2/24/2010
DWA OIL Index 197.14%
S&P 500 Equal Weight Index 69.38%

As you can see the oil sector outperformed the S&P by almost a 3:1 ratio when on the relative strength buy signal. The fact that oil index relative strength is now on a sell signal does not mean that you should go out and sell all of your oil stocks. It does suggest that going forward the oil sector may under-perform the overall market, so you may want to move some weighting away from this sector.

Below are the charts for the S&P 500 Spyder, US Crude Oil Future, and several major oil companies. The recent divergence is very apparent. Many charts of the major oils are breaking their intermediate term trend lines, while crude and the S&P remain in uptrends.

(click on charts to enlarge)

US CRUDE OIL