Out of Energy

After another big drop on Friday, stock market investors were on guard for big losses today. Instead the benchmarks soared higher. As impressive as today seemed, it really brought the major benchmarks and sectors back to where they were in the middle of last week. We suspect much of today's action was short-covering ahead of tomorrow's Federal Reserve policy meeting. Economists expect the Fed to leave rates unchanged but will look for signs that a rate cut is under consideration for later this year. Depending on the Fed news, more volatility is likely tomorrow afternoon and Wednesday.

As of last Thursday, the energy service sector still looked likely to recover from its recent downturn. Our indicators changed drastically after Friday's loss and did not improve today. Crude oil prices have dropped over 8% since an all-time high reached on August 1, including today's 4.5% decline. Rapidly spreading losses in the mortgage market, along with other economic data, are leading investors to think U.S. economic growth will slow significantly in the next few months. This would reduce the demand for energy, and thus energy prices are falling with energy-related equities not far behind.

To say this market has been a challenge would be an understatement. We have to strike a balance between staying flexible and maintaining our strategic discipline. As always, we look to the market itself for guidance. Over the years, it has been the best guide we know.