The main driver of weakness in the broader market is simple: continued signs of deterioration in the US economic picture. This really should come as little surprise to readers of The Energy Strategist; it’s long been my view that the US economy will remain weak at least through the first half of 2009.

As I outlined in the Feb. 4, 2009 issue, Stocks Trump Commodities, and in last week’s Pay Me Weekly, It’s Still the Economy, the only indicators within the Index of Leading Economic Indicators (LEI) showing signs of life are money supply and interest rate spreads. Neither ultra-low interest rates nor the fastest growth in money supply in a generation form the basis for a durable economic recovery. We absolutely need to see strength coming from other corners of the economy.

Bottom line: The economy is still weak and getting weaker.

Amid the gloom, there are a few positive signs. First, the stock market historically has bottomed out months before the economy troughs. While the major averages are at multiyear lows, market breadth has improved markedly–45 percent of the stocks in the S&P 500 are trading higher than they were in late November, as are 40 percent of the stocks in the S&P 500 Energy Index.

Some indexes have performed even better; for example, the Alerian MLP Index, a group we have heavy exposure to in TES, is still up 3 percent since the beginning of 2009 and an impressive 19 percent since its late-November lows.

My point: There will be opportunities for us to make money through careful stock and sector selection even if the broader market remains weak.

It’s also a positive that crude oil prices have failed to significantly breach their late-2008 lows despite the steady drumbeat of negative news. Based on the 12-month NYMEX strip–the average of the next 12 months’ worth of crude oil prices–West Texas Intermediate crude trades for USD47 a barrel after having successfully retested recent lows near USD43.

The oil market continues to be supported on the downside by supply concerns and capped by continued downside revisions to demand. Demand is driven solely by economic expectations and is likely to remain in the driver’s seat for at least the first half of 2009. By the end of this year I suspect supply will once again become the primary focus of the crude oil market. We’re already seeing signs all over the world of declining production capacity.

OPEC Secretary General Abdalla Salem El-Badri recently stated that of the 150 projects planned in OPEC countries for completion within the next four years, 35 have been delayed until after 2013. Crude oil prices of USD70 to USD80 are required to encourage new investments in production capacity, and the longer crude stays depressed the more supplies will fall. And supply doesn’t turn on a dime; when demand does stabilize, falling supply spells a rapid run-up in prices.

In light of this ongoing market turmoil, here are a few updates to TES recommendations.

ExxonMobil (NYSE: XOM) Covered Calls: I explained covered calls in the Dec. 24, 2008 issue, Buy Income, Super Oils and Gas. I recommend that all readers unfamiliar with covered calls check out that issue for a detailed rundown of how this trade works.

My specific recommendation was to buy Exxon and sell the February USD80 call options (Symbol: XOM BP) for a price of about USD3.25 each. Those February options have now expired worthless, meaning you get to keep the entire USD3.25 per option in premium. This effectively lowered our cost basis in Exxon to USD72.14.

With those calls expiring, we can now sell new calls and collect even more premium income. Specifically, I recommend selling the October 2009 Exxon Mobil call options (Symbol: XOM JP), currently trading around USD4.75. For every 100 shares of Exxon you own, sell one call contract for roughly USD475. This will have the effect of lowering our cost basis in Exxon to around USD67.39.

If Exxon closes above USD80 on Oct. 16, 2009, the total return on this covered call trade would be roughly 19 percent. If the stock closes under USD80, we’ll have the opportunity to sell yet another call against the shares of Exxon owned. I’ll continue to track the Exxon covered calls in the aggressive Gushers Portfolio.

Nabors Industries (NYSE: NBR): Contract land driller Nabors Industries has touched our recommended stop-loss order. The company certainly faces some headwinds this year due to extremely depressed US natural gas prices. Specifically, any rigs that aren’t under long-term contract will likely end up being idled or will work for a much lower day-rate than was the case a year ago. After all, the US active rig count–a measure of all rigs actively drilling in the US–is down close to 40 percent from its August 2008 high.

Offsetting that is the fact that Nabors does have some of the industry’s most capable rigs, absolutely needed for drilling the hot unconventional plays such as the Haynesville Shale. Companies with lower horsepower rigs such as Patterson-UTI (NSDQ: PTEN) are far more vulnerable to the drilling downturn in my view; Patterson is already losing market share in the US at an alarming pace. And a relatively large number of longer-term contracts, especially overseas, will also help Nabors.

I also believe that at around USD9 per share the stock is incredibly cheap and pricing in a lot of negative news. I still like Nabors longer-term, but it lacks near-term catalysts. If you were stopped out, I recommend standing aside for now. I’ll be carefully reviewing tonight’s scheduled earnings release for a better read on the stock; I’ll be looking for an opportunity to jump back in over the next few weeks.

Marathon Oil (NYSE: MRO): Marathon Oil, recommended as a trade on refiners in the Jan. 7, 2009 issue, Good Riddance, 2008, has also touched our recommended stop-loss.

There’s really no firm-specific fundamental catalyst for the stock’s drop in recent weeks. While the refiners have broadly outperformed, all stocks have been hit in the latest wave of selling.

I recommend standing aside from Marathon for now; however, I may look to jump back in at the first sign of stability for the broader market. The upside catalysts for the refiners I outlined in the Jan. 7 issue remain intact.