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Jeff Saut: A Great Time To Be An Investor (Really)


Don't be swayed by greed, fear.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Memo to investors:

This is what you get paid for. Volatility. Stomach-churning drops. Watching your paper wealth evaporate. Stock market profits aren't free. Garbage collectors (at least, in nonunion towns) know they have to turn up in the morning and pick up people's trash in order to get paid. Piano teachers know they have to teach piano to pay the rent. Shop keepers have to tend to a shop. Only investors in the stock market expect to be like the lilies of the field. They toil not, neither do they spin. Could Wall Street just send us the checks every month please? The reality is that investors have to earn their money, through brains and nerves. The brains can mean doing smart things – like buying Apple when it started to turn around. More often, they simply are doing dumb things, like buying The nerves mean not panicking or getting swayed by fear, at the bottom, or greed, at the top.
The Wall Street Journal Online

"The nerves mean not panicking or getting swayed by fear, at the bottom, or greed, at the top"; indeed, this is why another long-embraced mantra hangs on the wall of my office: "The stock market is fear, hope and greed, only loosely connected to the business cycle!"

To be sure, this is the only business where when prices are LOW they let stocks go; when prices are HIGH they want to buy. And that, ladies and gentlemen, seemed to be the mood on the Street of Dreams last week as participants "sold" at what I think feels more like the end of the envisioned selling stampede rather than the beginning of another new "leg" to the downside. Accordingly, my firm wrote a special strategy alert last Wednesday, July 2nd, one of only four such alerts we've penned over the past 10 years. It read:

"In yesterday's verbal strategy comments we stated, 'These will be the last strategy comments of the week.' But, little did we know that yesterday, and maybe today, would mark the potential turning point for the equity markets, at least on a short-term basis. Consequently, we thought we would share with you what we told institutional accounts all day yesterday. To wit, it is day 30 in the 'selling stampede' (today is day 31) and I can count on one hand when such skeins have lasted for more than 30 sessions. Moreover, our proprietary oversold indicator is more oversold than it has been in a few years. Additionally, the set-up looks right with EVERYBODY gone for the holiday-shortened week. The clincher was that we told our early morning callers the ideal daily pattern would be a sharply lower opening followed by a rally attempt, which fails, leading to a lower low with the equity markets then firming into the closing bell. And, that is exactly what we got! We further opined, 'We don't know if it will be Tuesday or Wednesday, so we recommend buying some trading positions today and tomorrow with close trailing stop-loss points to minimize the risk.'

At such a potential short-term downside inflection point, what you need to buy are those companies/indices with the best relative strength characteristics and those with the worst relative strength characteristics. Since we already own those with the best characteristics (energy, agriculture, materials, water, etc.), we concentrated on those with the worst characteristics. Consequently, our vehicles of choice were financials and real estate. The exchange-traded funds we're using are: ProShare Ultra Financials (UYG) ($19.54); Financial Select Sector SPDR (XLF) ($19.94); ProShare Ultra Real Estate (URE) ($26.66); SPDR S&P Homebuilders (XHB) ($15.98); and ProShares Ultra S&P 500 (SSO) ($59.82).

The call for today: Never say never; never say always; always reevaluate; and, never give up! Indeed, if at first you don't succeed, try, try again!"

Consistent with our strategy of NEVER buying an entire position all at once, my firm told accounts to buy a one-third trading tranche last Tuesday, another one-third tranche on Wednesday, and complete the final one-third tranche on Thursday -- before the long weekend -- if the equity markets took another tumble. Our strategy was based on the belief that Wall Street was "moving the headstones around, but not moving the graves!"

Manifestly, over the past few weeks, every time the "bears" have wanted to drive stocks lower they've trotted out rumors that Israel was going to bomb Iran and the Hormuz Straits would subsequently be closed. The result has been a surge in crude oil prices with an attendant stock swoon. To me, this constantly repeated rumor is getting pretty worn. Still, given last week's holiday-shortened, limited audience environment, the "sellers" had a vacuum in which to sell (no buyers), and the results speak for themselves.

My firm's stance was/is that if there were no geopolitical events over the holiday weekend, participants might just return in "buy 'em mode" with an upside "buying vacuum." Plainly, these thoughts have been reflected in our verbal comments, where we suggested what we're experiencing is a "raindrop bottom," whereby if you bought scaled "in" trading positions last week you might get hit by a few raindrops, but were unlikely to get very wet. So far, that stance has been generally correct, which brings us to this week.

For my firm and myself, this week is critical. Today is day 33 in the selling stampede, and unless we're in "crash mode," our belief is that we're making a "raindrop bottom" on a trading basis. Yet the situation is far from a "lead pipe cinch"; as the Lowry's organization noted in Friday's missive:

"Major market trends in the stock market are largely reflections of the collective emotions of hope, fear or greed expressed by millions of active investors... Last Friday, the DJIA finally fell 20% from its high, meaning the minimum requirement of an 'official' bear market... This looked to a gaggle of analysts as convincing evidence that the bear market was over just one day after it officially began.. [But], several factors make it unlikely that a major market low will be formed in the near future."

Unfortunately, I agree with the good folks at Lowry's about the longer-term scheme of things.

In fact, my firm is one of the very few that wrote about the Dow Theory "sell signal" registered in November 2007, which is why we entered 2008 in a cautious mode with oversized cash holdings. Yet we now think a tradable "low" is at hand and are positioning accounts accordingly. If we're wrong, we'll be stopped-out consistent with another one of our mantras: "Better to lose face and save skin!"

As for the investing side of portfolios, my firm continues to embrace the dividend yield theme, and our stock recommendations that play into it, as so often mentioned in these reports. We continue to invest accordingly.

The call for this week: I began this week's report with a quote from the Wall Street Journal: "The nerves mean not panicking or getting swayed by fear, at the bottom, or greed, at the top." Last November, my firm wrote about the Dow Theory "sell signal" when prices were high yet participants wanted to "buy." Now we're writing about the Dow Theory downside non-confirmation; prices are low, yet participants want to let stocks "go" (sell stocks).

Meanwhile, it's session 33 in the "selling stampede"; my firm's proprietary oversold indicator is more oversold than it was at the March 2003 "low" (we were bullish there as well); the spread between Lowry's Buying Power Index (demand) and Lowry's Selling Pressure Index (supply) is the widest in the 75-year history of Lowry's (indicating that stocks are severely oversold); corporate insiders' selling is at rock-bottom lows; and I'm seeing numerous indices not confirming the Dow Jones Industrial's "downside dive."

It's not that I'm turning aggressively bullish, but I think that, unless the markets are in "crash mode," it's time to consider a corrective stock market rally. B.J. Thomas is warming up the song "Raindrops" in the wings.
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