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Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (September 15):

Speaking to the trading side of the equation, we currently find ourselves in a conundrum. Our proprietary overbought/oversold indicator is within a few points of being as “oversold” as it was at the July “lows.” However, our seasonality pattern suggests caution until the beginning to middle of October. Therefore, we “sit” with regard to the overall stock market.

However, one group we have been recommending for the past two weeks has been energy. Indeed, while we were cautious on energy as the year began, given the HUGE price declines in certain energy stocks the risk/reward ratio appears again to be favorably skewed for investors and/or traders. As the good folks at Bespoke Investment Group wrote last week:

While we have been negative on oil and the energy sector for several months now, we would be remiss not to highlight that by at least one measure the S&P 500 Energy sector is near its most oversold levels going back to 1990. . . . Since 1990, there have only been nine other periods where the sector averaged less than negative 45% (advance/decline percentages), and they are highlighted with red circles in the nearby chart. (Shown below)

Consequently, last week we mentioned a number of energy stocks and ETFs for traders, as well as dividend-yielding energy situations for investors; all of which are favorably rated by our fundamental analysts.

The call for this week: Warren Buffett is fond of saying, “You only find out who’s swimming naked when the tide goes out;” and evidentially the biggest “nudie” is Merrill Lynch (MER) since the illuminati decided to save Mother Merrill and let Lehman (LEH) “go.” Clearly, Czar Paulson does not think the government should be in the business of assuming credit derivative risks (CDSs, etc.), which is the real story going forward.

Plainly, dealing with the derivative, and counterparty, risks will be the next piece of the puzzle as things continue to get curiouser and curiouser. The ideal daily pattern for today (Monday) would be for a hard down opening followed by a rally attempt, which fails, leading to an afternoon downside “washout” and then firming into the close. Any closing strength should be viewed as a positive since that would likely indicate a skein of positive closes.

While more conservative types should probably wait for the aforementioned pattern, more aggressive participants should buy the hard down opening on the belief that Paulson and Bernanke are cognizant of markets and will NOT want to see their “trifecta” come unraveled. Consequently, the Fed will be pumping money, short-sellers will be monitored, corporations will be urged to institute share buybacks, and mutual funds will be forced to buy. Being value buyers, the institutions will likely buy the drugs and food stocks first and then technology. As for us, we will be using ETFs.

Source: Energy: Now's the Time to Be Bold