Energy stocks and crude oil prices diverge
Market technicians know that equities lead the underlying commodity. This is partly because equities (or stocks) are widely held whereas commodities tend to be tightly traded. Just as falling gold stocks foreshadowed falling gold prices, high energy stock prices might be signalling a breakout in the price of crude.
Crude oil prices have been moving in a sideways wedge pattern, making lower highs and higher lows. This signals an equilibrium between the bulls and bears, leading to a perfect stand-off between buyers and sellers. Eventually, this stand-off will be broken. If the market technicians are right, crude oil prices will likely break-out to the upside.
While crude prices are trending sideways, US energy stocks continue to hit new highs. Consider the S&P500 Energy Sector Index, a widely held basket of producers, oil field service companies and energy pipelines - the index hit new highs again last week, exceeding prices not seen since the peak of July 2008.
So how does one profit from rising crude prices? One obvious choice is to purchase a call option on crude oil futures contracts. However, a simpler strategy would be to purchase the United States Oil Exchange Traded Fund (ticker: USO). This ETF tracks the price of WTI and trades much like a common stock on the NYSE.
Remember the old adage: commodities go up in stairs and come down in elevators. As witnessed in late 2008, reversals in the commodities market can be sharp and painful. So trade carefully!