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Jeff Saut: Why Investors Should Think Like China


And two stocks to profit from that thinking.

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.

Equity markets seem to have lost their hope and security over the past 3 weeks. To be sure, we have now had a 90% downside day (90% of total cumulative points and volume are skewed to the downside) in each of the past 3 weeks (July 2; June 22; June 15).

History suggests that multiple 90% downside days increase the odds that a downtrend pattern has begun. So far, any downside correction since the early March lows has been contained to between 5% and 6.4%. That suggests any correction greater than 6.4% could imply more of a correction than any we have seen since the demonic S&P 500 low of 666.

Regrettably, measuring from the June 11 intra-day high to the intra-day low of June 23 yields roughly a 7% loss -- which also increases the odds that a downtrend has begun. Furthermore, last week's wilt left the S&P 500 below its 10-day moving average (DMA) at 911.58, as well as its 50-DMA at 908.39.

Consequently, if the SPX closes below its 200-DMA (currently at 887.91), we'd take it as another sign that the support level between 870 and 880 is going to fall, bringing into view downside targets between 820 and 830.

That being said, I still think it's a mistake to become too bearish here. I would direct your attention to the current issue of Time, with the cover story "What Barack Obama Can Learn From FDR." Consider this quote from said article: "Franklin D. Roosevelt led the US through a Depression and a world war. By the time he died, the nation was profoundly changed -- and we owe much of the change to his bold presidency."

As the astute Richard Russell of the Dow Theory Letters writes:

"It's obvious to me that Barack Obama is following precisely in the footsteps of FDR. One item that Time magazine left out of their special issue is that through a series of gold-related actions, which culminated in the Gold Reserve Act of 1934, the US realized a dollar devaluation of 41%, when the government officially raised the price of gold from $20.67 to $35 an ounce. This occurred during the depth of the Great Depression, and during a bull market that started in 1932 and ended in 1937.

"During the devaluation, the price of debt remained the same, but dollars were cheaper. This allowed the US to handle debt more easily with debt being paid off with cheaper dollars. At the time of the devaluation (January 1934), the Dow was 110. By March 1937, the Dow had risen to 194. During this period, Roosevelt instituted his 'New Deal' with all its new alphabet agencies such as the WPA, the PWA, and the CCC.

Time article continues, 'But the crisis of the 1930s also provided an object lesson in the relationship between economic danger and political opportunities -- a lesson Barack Obama is now trying to follow. Obama took care to persuade Americans in the midst of an economic crisis, and in the solutions he has offered, it appears that Obama has often looked to the example of FDR, whose presidency -- and the very idea of activist government that it represents -- is very much back in the public mind this year. Roosevelt pushed through policies that aimed not just to deal with the immediate challenge of the Great Depression, but also to benefit generations of Americans to come. Pulling off a similar feat will require Obama to persuade Americans to see opportunities in the present crisis as well.' "
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