Energy Surge

Crude oil peaked above $70 today. Energy stocks initially led a broad market surge, but momentum slowed after the Federal Reserve kept interest rates steady, citing reduced inflation pressure. Technology stocks were also strong, especially semiconductor and networking issues.

The S&P 500 briefly regained its 50-day moving average today before falling back just before the close. It now appears that a wave of selling on Wednesday morning may have brought the recent downtrend to a climax. The index stopped falling just as it reached the June 8th low, so the current trading range is still intact. Another test of the top around 1540 could come in the next week or two.

The jump in crude oil came after a weekly inventory report yesterday showed tighter supplies and increased demand from refineries. Increasing unrest in the Middle East is also creating more concern than usual. Riots were reported this week throughout Iran when the government imposed gasoline rationing. Iran has plenty of crude oil, of course, but lacks refining capacity and has to import a large part of its gasoline and other fuels. If the U.S. succeeds in convincing other nations to impose further economic sanctions on Iran, domestic discord seems likely to increase. This doesn't necessarily mean open warfare will break out, but, as we have seen before, fear of the unknown is enough to drive prices higher. It's easy to imagine the Iranian government deciding to do something dramatic in order to divert public attention from economic woes.

If today's patterns continue, with energy and technology providing market leadership, our portfolios will be in good position to take advantage of the trends. Technology may actually have more upside at this point, having lagged behind while energy climbed this year, but these things are always difficult to predict.