Rally Pauses as Oil Perks Up

The September rally paused Monday as oil and gas bounced off of their recent lows.

Oil rose above $64 in intraday trading before ending up 0.73% to $63.79 per barrel. Gasoline gained 0.7% to close at $1.58 per gallon, and heating oil jumped 1.51% to close at $1.72 per barrel.

Major averages were relatively flat Monday, but signs of anxiety emerged after the recent rally and ahead of a hefty week of economic data and a Federal Reserve policy meeting.

"We reset the bar of tolerance every week," says Art Hogan, chief market strategist at Jefferies & Co. For a while, $70 per barrel was tolerance, then $75, and now that oil dipped below $63, $64 is a little disquieting, he says.

"Non-traditional investors are fueling the market, and in energy in particular," says Hogan. "Momentum came into the space, and these cowboys get in and out at the same time. We're seeing some of that now."

Indeed, news emerged Monday that the large hedge fund Amaranth's returns were in the red by 35% because of its bad bets in natural gas. Last week, The Wall Street Journal highlighted several large hedge funds that were sporting returns not even matching the S&P 500's 5.8% year-to-date return.

The FOMC meeting Wednesday is not expected to bring any surprises (read: the Fed leaves the funds rate at 5.25%). But news on housing and inflation could always challenge the market's self-assurance about an economic soft landing. The Labor Department reports the producer price index Tuesday, and the Census Bureau reports on housing starts.