MARKET CALL: Devil-May-Care

In the autumn of 1956, Egypt's Gamal Abdel Nasser nationalized the Suez Canal. Britain, France, and Israel invaded. The canal closed for five months. Two-thirds of Western Europe's oil moved through it, and the price of crude doubled in dollar terms before the year was out. The Dow Jones Industrial Average fell about 10% from its July high to its October low. Tankers were forced to reroute. By the following spring, with the canal reopened, the DJIA had recovered and reached a new high. With the exception of the 1970s, geopolitical oil supply shocks have tended to be buying opportunities for stocks.

Investors reached the same conclusion again, this time on March 31. The fact that the Strait remains closed hasn't stopped the extraordinary stock market rally since then. Interestingly, the S&P 500 Energy and Information Technology sectors are now more overvalued relative to their 200-day moving averages than they were at the market's January 27 peak (chart). This suggests that many investors may have a barbell position across these two sectors, in case everything goes right (so IT wins) or wrong (so Energy wins). That makes sense to us since we are recommending a market weight in IT and an overweight in Energy.