Which is a better investment – Oil or the General Stock Market

Posted by Nico Isaac - Elliottwave International

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On Monday April 20, two main events took top billing in the financial press: the Dow Jones Industrial Average plunged 290 points. And, oil prices suffered their biggest-single day drop in over three months.

According to the mainstream experts, the first event was directly related to the second, as these news items from the day make plain:

  • “Crude Plunges to One-Month Low on Doubts about the Economy.” (Wall Street Journal)
  • “Oil futures fell more than $4 as stock markets retreated.” (CNN Money)
  • And: “Oil Falls to near $45 as Stock Market Sinks… Wherever the stock market is, that’s where we have a tendency to end up with oil.” (AP)

It’s easy enough to see if there’s any truth to this “new” shift in the oil/stock paradigm: From negatively to positively correlated: Stock AND oil prices would be locked in step since the global meltdown was declared in 2007.

This is absolutely NOT the case.

On Tuesday, April 21 my colleagues designed the following chart of the Dow Jones Industrial Average versus Crude Oil since January 2007.

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As you can see, the relationship is anything but synchronized:

January 2007 to October 2007: Crude oil surged from below $60 per barrel to nearly $80 per barrel; the DJIA also soared to an all-time record high of 14,279.

October 2007 to July 2008: Crude oil continued to rocket above $100 per barrel to a new, lifetime high, while the Dow plummeted more than 20% in a precipitous decline.

July 2008 to November 2008: Nine months after stocks peaked, crude finally joined the Dow on the downside.

November 21, 2008 to early January 2009: Crude endures an uninterrupted losing streak to a five-year low, while the Dow reclaims the upside in a 19% rally.

January to March: Crude’s southern route continued until hitting bottom in mid-February, a slide mirrored by stocks. YET — the Dow’s decline did not cease until reaching its own 12-year low on March 9.

Since then, crude prices have been bouncing around like a Mexican jumping bean, while stocks are moving in on week SEVEN of an uninterrupted winning streak.

(The Big Picture in Black Gold: Only those who saw the 70%-plus sell-off in crude BEFORE it began can say where the energy market may be headed next. Get the complete Financial Forecast Service today to find out. Click HERE)