by Jeffrey Saut, Chief Investment Strategist, Raymond James
September 23, 2013
Thank you Franklin Templeton for allowing me to speak at your world headquarters in San Mateo, California last week. I had the privilege of meeting John Templeton on a number of occasions and it is heartwarming to see your organization carrying on with Sir John’s impeccable traditions. Thanks to all the portfolio managers (PMs) that met with me in the San Francisco Bay area, as we swapped ideas and renewed friendships. Thanks to all the PMs and friends from Walnut Creek-based Accuvest Global Advisors that helped sponsor and, along with me, were speakers for two of the seminars held for our financial advisors and their clients. Also thanks to Accuvest for having the number one performing strategy in its peer group, as recognized by PSN for the 4Q12 and the full year of 2012. That Global Opportunity Strategy (in part) is used in the Accuvest Global Opportunity ETF (ACCU/$27.71). Many thanks to Ben Bernanke for not “tapering” last Wednesday, which made my two-month prediction that he would NOT reduce the Fed’s asset purchase program in September. And a special thanks to Wells Fargo’s strategist Gina Martin Adams for making my so far wrong-footed “call” for a 10% pullback look raveningly bullish given her “call” for the S&P 500 (SPX/1709.91) to fall to 1440 before the end of this year.
The week began as I landed in San Francisco last Sunday and had dinner with two PMs. The discussion centered on what went wrong with my 10% pullback “call.” As repeatedly stated, I thought we were only halfway through the decline at about the down 5% low point of August 28th; but, the Syrian chemical deal wrecked the rhythm of the decline. Then came the bullish change in three of the D-J Industrial Average’s components, which caused me to suggest recommitting a portion of the cash raised in June anticipating a decline beginning in the mid-July through mid-August timeframe. That said, I only recommended a portion (not all) of the cash be recommitted because something still did/does not feel right to me about this stock market. Subsequently, in last Thursday’s Morning Tack, I noted that Bernanke had done what I had suggested he would do – no taper – and the resulting Dow Wow should be sold on a trading basis. Manifestly, last Wednesday’s Win looked like a giant short-covering rally to me; and why not, because if you were short, you almost had to cover those shorts on the prospects of continuing “free money.” What was interesting about last week’s action was that typically, after a huge momentum move like Wednesday’s “no taper” rally, the equity markets tend to trade sideways for a few days. That just didn’t happen as the S&P 500 pulled right back to its previous intraday high of 1709.67 (August 2, 2013). Therefore, it will be interesting to see how the SPX reacts off of that pivot point this week.
Also of interest is that the nascent “great rotation,” whereby investors sell bonds and buy stocks, accelerated over the past two weeks. According to the Lipper organization, more than $30 billion dollars has flowed into equity-centric mutual funds and ETFs during the past few weeks, eclipsing the previous record of $28 billion. Studying the attendant chart (see page 2) from Jason Goepfert’s sagacious SentimenTrader service shows that occurrences like this have tended to precede at least short-term pullbacks. Moreover, the history of September option expiration weeks (this week) is not favorable for stocks.
All of these short-term machinations, however, should be taken within the context of a secular bull market. Verily, we got yet another Dow Theory “buy signal” last week, as the majority of the indices I monitor rose to new bull market highs. And while the NYSE “all issues” Advance-Decline Line did not confirm by making a new high, the Operating Company Only Advance-Decline Line did. Meanwhile, the Buying Power Index has traveled above its July high and the Selling Pressure Index is at multi-year lows. All of this suggests higher prices in the months ahead. Nevertheless, many seers are arguing that at 55 months (since the March 2009 low) this bull move is long of tooth. If you measure from those March 2009 lows, there is some truth to their worries (since 1871 the median bull market has lasted 50 months). However, when studying the last 16-year range-bound stock market (1966 – 1982) one observes the nominal price low came in December 1974, but the valuation-low (the cheapest P/E multiple, price to book value, etc.) did not arrive until August 1982. Similarly, for four years, I have argued the nominal price low for the recent 12-year range-bound market (2000 – 2012) was March 6, 2009. Then, at the November 4, 2011 “undercut low,” I opined that was the valuation low given the valuation metrics. Measuring from that date shows the current bull market is only 21 months old, proving where you stand is a function of where you sit, or that you can make numbers do anything.
Last week, as I spun my yarn in the Bay area, only one of my themes prompted “pushback.” I expect we are going to elect smarter policymakers over the next three to five years and hence get smarter policies. When I look around, I think that is happening. Thank you Senators King and Blunt for introducing the King-Blunt Bill that would eliminate much of the burdensome and unnecessary regulations that are stifling business creation in this country (The Regulatory Improvement Act of 2013). If enacted, said bill would streamline, consolidate, and repeal onerous and costly government regulations, while encouraging growth and innovation (read about it here). Thank you House of Representatives for passing a reduction in the abused food stamp program, and while it is too austere, it is a step in the right direction. Thank you teachers of Kenosha, Wisconsin for basically opting out of the union. Indeed, there are a lot of good things going on. To wit, existing home sales rose to a six-year high despite the rise in mortgage rates, Detroit’s bankruptcy (my home city) is causing that city to finally address its problems, according to IHS Global Insights fracking added the equivalent of $1,200 to real household disposable income (on average) in 2012, median family income in the U.S. stabilized last year for the first time since the recession, federal tax receipts are up $284 billion for the first 11 months of this fiscal year, from a record $1.4 trillion (in 2009) the federal deficit will drop to a much smaller than estimated $642 billion this year, and the list goes on. Be optimistic my friends, be optimistic ...
The call for this week: As expected, Bernanke did not taper last week. As not expected, most of the major market indices I monitor made new all-time highs, rendering another Dow Theory “buy signal.” However, last Wednesday’s upside explosion looked conspicuously like a short-covering, upside, exhaustion rally. That view was reinforced by the relatively quick “giveback” of Thursday/Friday. As stated, typically after a huge momentum move, like Wednesday’s “no taper” rally, the equity markets will trade sideways for a few days. That just didn’t happen as the S&P 500 pulled right back to its previous intraday high of 1709.67 (August 2, 2013). Historically, there is evidence that when you get a momentum move like last Wednesday’s, which is followed by a closing price below a previous high, it has resulted in more of a pullback. Therefore, it will be interesting to see how the SPX reacts off of the August 2nd pivot point of 1709.67 this week.