Holding Pattern

A three day rally brought the U.S. stock market back near the top of its short-term trading range. An interesting chart pattern has developed in the S&P 500 over the last four weeks. Intraday high and low points show, since August 16, a series of lower highs and higher lows. In other words, stocks are trading within an increasingly narrow channel. One trendline or the other will have to break soon.

We suspect this quandary will be resolved through the catalyst of next Tuesday's Federal Open Market Committee meeting. Trading in the futures markets indicates a high probablity of a 50 basis point cut in the Federal Funds rate, from the current 5.25% to 4.75%. Anything less will be considered a disappointment. Fed Chairman Ben Barnanke and the other committee members haven't dropped very many hints, which suggests the market is probably guessing right. Pundits are now turning their attention to the impact a rate cut will have on the U.S. dollar. It won't be good, but the question is whether the effect is already reflected in exchange rates.

A weaker dollar is typically good news for commodity prices. This may be why crude oil rose to a new record high on Wednesday, briefly trading above $80. Energy-related equities, while picking up some momentum, still remain well below their July peaks. Gold has also popped higher, moving above $700 and sparking a rally in gold stocks. Fidelity Select Gold (FSAGX), for instance, jumped from # 25 in our momentum ratings this time last week to # 2 in today's table. We've seen it move just as quickly in the other direction, though, so we are not ready to buy gold funds just yet.