By Nigam Arora
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.
Please click here for an annotated chart of crude oil ETF /zigman2/quotes/203483736/composite USO -0.53% . Those with more sophistication may consider using a chart of oil futures . 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 /zigman2/quotes/209901640/composite SPY +1.62% , which represents the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.60% . Similar conclusions can be drawn by comparing crude oil with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.34% , Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +2.32% and small-cap ETF /zigman2/quotes/209961116/composite IWM +1.62% .
• 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 /zigman2/quotes/210331248/composite AMZN +2.49% , Apple /zigman2/quotes/202934861/composite AAPL +3.75% , Netflix /zigman2/quotes/202353025/composite NFLX +2.07% and Google /zigman2/quotes/205453964/composite GOOG +1.17% /zigman2/quotes/202490156/composite GOOGL +1.14% .
• 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.
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.