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Oil Services Ready to Run?

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When I see a relationship in the market that tends to hold true over time, it always peaks my interest when the market varies from that "norm".  That seems to be the case right now with oil services stocks.  Generally speaking, when oil prices rise, money flows to oil services stocks relative to the S&P 500.  Likewise, when oil prices are on the decline, I expect to see oil services stocks struggle.  Take a look at the following chart to see the relationship that exists between the direction of oil prices and the relative performance of oil services stocks:

Oil Services vs. S&P 500 12.5.09
Notice how oil services stocks have fallen quite a bit on a relative basis in the last two months?  Crude oil has ticked a little lower, but not enough to cause oil services to drop so much.  I believe this skewed relationship will resolve itself in time by oil services stocks outperforming.  Time will tell.

Some wonder why oil prices aren't following gold prices higher.  After all, the dollar continues to weaken and gold is benefiting, why isn't oil?  Personally, I believe there are other influences at work in taking gold higher.  Gold is a hedge against a weak dollar, inflation and deflation.  Right now, we have folks in all three camps.  It seems that everyone wants to own gold and we can't fight the tape.  Let's get back to oil and the dollar for a moment.  Oil has benefited from a weak dollar.  Oil has roughly doubled during 2009.  That increase is partly due to an improving economic picture, but the weaker dollar has contributed as well.  My view is the dollar will remain under pressure for the foreseeable future and that will only aid crude oil and oil services stocks.

The market overall continues to gyrate back and forth.  The major indices have edged mostly higher over the past couple months, but rotation has been the name of the game.  No one sector - other than gold and perhaps healthcare - has been able to maintain a consistent uptrend since the May/June highs.  That has left us with a mostly trendless market where timing is critical, both at the sector and individual stock level.

Everyone must remain patient in a market like the one we've been in for last few months.  I like to focus exclusively on low risk, high reward trade candidates while in this type of market environment.  Trade fewer shares and be willing to accept smaller profits.  Otherwise, profits evaporate as sectors rotate.  Another requirement to profitable trading in this environment is to keep stops in place.  Small losses don't hurt much, but big losses are hard to recover when the market is essentially trendless.

Feel free to check out my Chart of the Day at Invested Central.  I scan for stocks that fit the description above and provide annotated charts and a brief analysis every day as educational reinforcement.  CLICK HERE to check it out.

Happy trading!

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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