Fear One Day, Greed The Next

The stock market seems unable to make up its mind which way to go recently, swinging between unreasonable fear to unrealistic euphoria from day to day and even hour to hour. To some degree this is simply normal volatility, which is surprising to investors only because they have been treated to historically unusual stability for the last few years. We think another factor is also at work: the major benchmarks, other than the Nasdaq, are at or near all-time highs and are naturally encountering resistance at this level. A few weeks or even months of consolidation in preparation for a breakthrough is typical in these situations. The fact that downturns have been contained suggests that long-term uptrends will ultimately prevail.

The energy sector corrected slightly on Wednesday but took off again today as crude oil again threatened to move above $70. We are entering a seasonally strong period for the energy sector, with increased summer demand and the potential for supply disruptions from hurricanes and political instability in oil-producing regions. Rebel attacks on energy facilities in Nigeria are only the latest difficulty. We fully expect the energy sector to remain very volatile, but the dominant trend is up.

We are also increasingly impressed with bullish action in the technology sector, and particularly semiconductors and telecommunications. Much of this is related the the impending introduction of the iPhone from Apple (AAPL). While expectations for the iPhone are almost impossibly high and disappointment seems likely once it is released, competitors are still racing to introduce new devices that promise to revolutionize mobile communications. This translates into high demand for the microchips that power these devices and the companies that operate wireless communication networks. As with energy, we anticipate significant volatility but will watch this sector closely.