Jeff Saut Presents: Circle Completed?!
"Was the decline from last Wednesday's high of 11670 into Friday's low of 11374 merely the pause that refreshes, or something more ominous?"
11670!? Is that the top of the completed circle? Well, the DJIA made a valiant attempt to better its all-time high of 11722 last week and failed. In the process, the Dow's intraday high for the week turned out to be just that . . . 11670.19. Thus the question now becomes, "Was the decline from last Wednesday's high of 11670 into Friday's low of 11374 merely the pause that refreshes, or something more ominous?" Regrettably, we remain decidedly indecisive on that question having been wrongly "too cautious" since January by thinking that the highs were "in" for the year. While that was clearly not the case for the DJIA, and certain other indexes, our caution has indeed been warranted on other indices given that many of them continue to reside below where they were in January. In fact, the D-J Utility Average actually peaked last October and is now down over 9% from those levels. We have spoken about such "upside" non-confirmations for months as the market's internals were deteriorating. Now we have a major non-confirmation with the D-J Transportation Average making new all-time highs last week (5013.67) just as the DJIA failed to do the same. Even more disturbing is that Lowry's Selling Pressure Index (read: supply) registered a multi-year high last week, while Lowry's Buying Power Index (read: demand) recorded a multi-year low.
Forgetting the marquee indexes, let's turn to a few of the "lead dogs" since the October 2005 lows, one of which is the Russell 2000 (RUT). As seen in the chart below, since its March 2003 low, every time the RUT has broken below a well-established, upward-sloping, trendline, it has experienced a pretty decent decline. Also notice how the 50-day moving average (DMA) has tended to arrest each pullback while the Russell was in an uptrend. As well, notice that when its 50-DMA was violated, it has been a fairly good cautionary signal. Unfortunately, both the Russell's trendline, and its 50-DMA, were broken to the downside last week. The other "lead dog" we have been watching is the Security Broker/Dealer Index (XBD). As stated, "When the 'brokers' head down, the whole market will likely head down." Hereto, the XBD has broken down and, in the process, given a "sell signal." And speaking of sell signals, despite our cautionary stance since January, we have repeatedly stated that, "While cautious, we have not gotten a sell signal." Alas, that too changed last week when our proprietary indicators rendered that long-awaited sell signal.
"Okay Jeff," one money manager said to us last Friday, "I know you're cautious on the overall equity markets, but what about your stuff stocks that we own so heavily?" Well, like the equity markets, many commodities (gold, silver, nickel, copper, etc.) reversed to the downside late last week. Whether those downside reversals are short-term, or intermediate-term, in nature is unknowable. But, longer-term we remain unflappably bullish on "stuff." That is why we have been rebalancing (read: selling partial positions) our stuff-stock positions for the past few months so that we would have the "staying power" to stick with our core stuff stock positions during what was certain to be a hard downside shakeout within a continuing secular bull market.
Our view on "stuff" was best summed-up in Barron's over the weekend by Randall W. Forsyth in his quote from Woody Dorsey regarding commodities. To wit:
"Think of Madonna's career, Woody told a clients' lunch. First there was the discovery stage, where only the truly hip heard of her. The peak probably would be around 'Truth or Dare' in 1991. And now with her embrace of Kabballah and domesticity, she's definitively heading toward camp. So where are commodities on the Madonna timeline? Around 'Like a Virgin,' her big hit that put her on the MTV map in 1984, says Woody, or just the discovery stage in this cycle. And like Madonna, who has been able to extend her career into the third decade, commodities' run has a long way to go, he says. It is a secular, even generational, trend."
In conclusion, we leave you with this "time tested" quote from savvy seer Justin Mamis who opined years ago:
"Everyone kept saying 'a top is not in place yet.' They persistently pointed to the 'normally reached' levels of this or that statistic that were not yet there to reinforce their desire to remain bullish. . . . apart from statistical measures of increasing blindness, this unwillingness to acknowledge what they themselves were already feeling revealed a comfortableness, a confidence, a conviction that whatever was happening – short-term survivable dips – would continue . . . until 'the top,' like a strip tease artiste of our youth would with decorum appear on stage, bow, and then, accompanied by applause from all the bulls eager to cash in on their excitement, would begin to twirl its statistical tassels in front of everyone.
"I've gotten so old I can't remember the names of those ladies at the Old Howard, but I can remember that all you got was a flash of this or that, before they waltzed off. Stock market tops are like that. You know it's there somewhere if you squint hard enough, but you never quite see it, so you keep waiting for more. And then, in the end, as the curtain comes down on the bull market you realize that the one rule about tops is not that they provide this or that signal, but that they come before anyone is ready."
The call for this week: We remain "predominately defensive," to use a phrase from Charlie Knott, eponymous captain of Knott Capital Management, whose mutual funds we hardily endorse. Accordingly, we continue to try and buy the "flops" in what we think are fundamental sound companies like Outperform-rated United Healthcare (UNH), which our healthcare analyst thinks is a good "bet" given its recent 30%+ downside correction on the "stock option" controversy. We believe such price concessions take much of the price-risk out of the investment equation, a strategy that has served us well over the past 35 years. As for the short-term, if past is prelude last week's Dow Dive should attempt to bottom in one to three sessions leading to a "throwback" rally. If that rally fails to make a higher high, it spells trouble for the overall stock market averages, which is why we remain defensive. And, don't look now, but each time the Fed has raised the discount rate to 6%, like they did last week, it has spelled trouble for stocks . . . e-v-e-r-y time! Concerning the near ubiquitous question, "When will the Fed quit raising interest rates?" With so many asking, history suggests this is likely NOT the right question! Maybe participants should consider the fact that Asian central banks have begun to raise interest rates, or that the Dollar Index is now down over 8% year-to-date causing one savvy seer to ask, "Are stocks going up, or is the measuring stick (a.k.a. the dollar) going down?"
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