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One of the most important developments of the past week was the newfound strength of big-cap energy, such as Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), which are among the largest weightings in the S&P 500 and Dow Jones Industrials Average. These stocks have been a massive drag to the indexes for the past two years. The Dow and S&P 500 have been lugging around these dead weights, severely hampering their performance.
As you can see above, XOM did not bottom in March 2009 with everything else -- it bottomed in July of this year. If these stocks can maintain their momentum, the broad market will have a much easier time achieving our upside goal for the S&P 500 in 2011, which is 1,400.
What's the central theme here? Well, my friend Terry Bedford, who runs a hedge fund in Toronto, calls the stocks' action this week a great example of an "objects in motion" trade. He's referring to Sir Isaac Newton's first law of motion, the foundation of mechanics. The layman's version of Newton's first law is that a "body" -- a particle, a stock, a major league baseball -- remains in a state of uniform motion until it is acted upon by an external unbalanced force.
Another way to say that is, "the trend is your friend until it ends." Or as Jesse Livermore would put it, "the path of least resistance is higher." All of which reminds me of the third law of financial writing: For every action there is an equal and appropriate cliche.
Bottom line: When markets are performing poorly, we spend a lot of time analyzing the economy, mulling over credit default swaps, talking about politics and generally trying to find reasons stocks aren't moving. When markets are performing well, it's better not to think too much. Just go with the flow, find stocks and funds that are rebounding amid uptrends, and enjoy the calm while it lasts.