Jeffrey Saut: "Investment Strategy: Peter Pan?!"

by Jeffrey Saut, Chief Investment Strategist, Raymond James

Washington D.C. is not considered a city noted for theatrical productions. Most of the central city empties out after work heading for the suburbs, and much of the downtown area is virtually deserted after dark. There are good bars, restaurants and hotels, but that seems to be the extent of nighttime activities. There was one play that did have a lengthy run in Washington. J.M. Barrie’s “Peter Pan” starring Sandy Duncan as “The Boy Who Never Grew Up” had the longest run at the time of any play produced in the nation’s capital. In an interview, Ms. Duncan was asked why the play had lasted as long as it did. Her answer was, “I think it’s because people in this town relate easily to fantasy.” I saw the play with Mary Martin in the title role. At each performance the actress (or actor) playing Peter Pan turns to the audience and says, “Do you believe in fairies? If you believe, clap your hands!” The last line is repeated until the house is clapping wildly.

. . . Ray Devoe, The DeVoe Report (2003)

I lived in and around the D.C. Beltway for years, and still have a good network on Capitol Hill. I have been thinking a lot about Ms. Duncan’s comments concerning people in D.C. easily being able to relate to fantasy given the current “fantasies” swirling around the “Beltway” since the presidential election. As the Trump administration entered the scene, the song “I Believe I Can Fly” was playing (I Believe), but alas such “beliefs” always seem to get dashed for the naïve newcomers, and 2017 is no exception. To be sure, the defeat of the AHCA bill (aka: Ryancare [H.R. 1628]) was a big blow to the Trump administration despite the fact it was a bad bill if you took the time to read it. BTW, very few people took the time to read the Obamacare bill (ACA) that just about any doctor will tell you is a complete disaster. So President Trump has decided to let the Affordable Care Act implode and then they will attempt to repair it. I think that will prove to be a very difficult task, but opinions vary.

Clearly, opinions varied last week on the Street of Dreams as the S&P 500 (SPX/2362.72) meandered through the week vacillating in a narrow range between 2341.59 and 2368.06 as buyers and sellers were evenly matched. In fact Friday’s trading range was between 2370.35 and 2362.60 making Friday yet another “inside day” because that range was inside Thursday’s trading range (2370.42 – 2358.58). According to Investopedia:

An inside day is often used to signal indecision because neither the bulls nor the bears are able to send the price beyond the range of the previous day. If an inside day is found at the end of a prolonged downtrend, and is located near a level of support, it can be used to signal a bullish shift in trend. Conversely, an inside day found near the end of a prolonged uptrend may suggest that the rally is getting exhausted and is likely to reverse.

Clearly the recent string of “inside days” has not come at the end of a prolonged downtrend since all we have experienced is a 3.3% decline. However, a support level was indeed found slightly above the upside chart gap created on February 13 of this year often referenced in these missives. The quid pro quo is that these “inside days” have not really occurred after a prolonged uptrend either, so if using Investopedia’s definition, these “inside days” are confused. Plainly that concurs with our short-term and intermediate-term proprietary models, which are back in sync in cautionary mode. Recall, both of those models target late-January/early-February as a potential window of downside vulnerability. Yet the short-term model flipped positive around the beginning of March while the intermediate model stayed negatively configured (read: confused). The recent stock market action, however, has caused our short-term model to again flip negative. We will note that the market’s “internal energy,” which suggested a pullback was coming, has been used up in the 3.3% decline and is in the process of rebuilding. While this could be the set-up for an energy release on the upside, our hunch is that it will come on the downside implying the long targeted 2278 level on the S&P 500 (SPX/2362.72) remains in play. Bear in mind that these “trading finesses” are just that, short/intermediate tactical trading “calls” because as my friend – oracle Leon Tuey – writes:

As mentioned, an internal correction has already commenced and is starting to broaden as since December several sectors have been correcting. In December, because of the grossly overbought condition and deteriorating sentiment backdrop, I felt that from an intermediate standpoint, the market was vulnerable to a correction. But given the widespread wariness, the huge cash pile on the sideline and improving fundamentals, the correction will prove to be more of a rotational/time correction rather than magnitude. Accordingly, emphasis should be on stock selection.

That’s very well said, so let’s reflect on the stocks featured in these missives since the beginning of February. All of the following stocks continue to have positive ratings by our fundamental analysts. Netflix (NFLX/$147.81/Outperform), Alibaba (BABA/$107.83/Strong Buy), American Financial AFG/$95.42/Outperform), Applied Optoelectronics (AAOI/$56.15/Strong Buy), DexCom (DXCM/$84.73/Outperform) and Trimble Inc. (TRMB/$32.01/Outperform) have all registered upside breakouts in the charts. Cavium (CAVM/$71.66/Strong Buy), Premier, Inc. (PINC/$31.83/Outperform) Hilton (HLT/$58.46/Outperform), Iridium (IRDM/$9.65/Strong Buy), Texas Bancshares (TCBI/$83.45/Outperform), ServiceNow (NOW/$87.47/Strong Buy), and Marinemax (HZO/$21.65/Strong Buy) have all gone nowhere, which is consistent with our observation that not much money has been made since the first week of February.

The call for this week: The week is chock-full of news and events. Economically speaking we get world market PMIs, ISM Manufacturing, Construction Spending, auto sales, and the jobs report to names but a few. As for events, we have the Michael Flynn scandal, the President Trump and China’s President Xi meeting, the continuing Russian brouhaha, the “leaks” about Kushner, Ivanka, and Gary Cohn, the Gorsuch vote, numerous Fed speakers, the resignation of Reince Priebus’ deputy, well you get the idea. The sad fact is that President Trump has not really had a good day since his address to Congress. Hopefully that changes this week. And then there was this from Leon Tuey:

Keep in mind that the market’s secular trend remains powerfully bullish and no end is in sight. The market does not rise in a straight line. Corrections are normal and healthy; they should be bought and not feared. The media always have a habit of spreading fear because fear sells. No doubt, as the correction widens, the headlines will get blacker. It is important for investors to ignore the headlines as they tell you what happened yesterday, not what lies ahead. Focus on the “primary trend.”

As our readers know, we have been steadfast in the belief that the “primary trend” was, and is, bullish since the October 2008 – March 2009 bottoming process despite some of our short/intermediate-term “pullback calls.” This morning the preopening futures are marginally higher as Commerce Secretary Ross criticizes China as a protectionist country ahead of this week’s meeting with President Trump. But, it is later in the week when our internal energy measurement is slated to be released.

Copyright © Raymond James