Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Jeff Saut: Three Reasons a Buy Signal Means Sell


Equity markets looking like a short-term sell.

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.

Well, it finally happened.

Last Friday, the Dow Jones Transportation Average (DJTA) confirmed the Dow Jones Industrial Average's (DJIA) breakout above its January 6, 2009 closing high of 9015.10, thus rendering a Dow Theory Buy Signal.

Recall that the DJIA bettered its January 6, 2009 high on July 23, but until last Friday, the DJTA had refused to breach its January 6 closing high of 3717.26. Consequently, since the third week of July, I've stated that either the Trannies would confirm the Dow's breakout, or I'd be left with a giant upside non-confirmation (read: bearishly).

However, last Friday, the Transports finally confirmed the upside, and in the process rendered the long-awaited buy signal, at least according to my interpretation of Dow Theory. That said, for months I've opined that if a Dow Theory buy signal was eventually registered, so much energy would have been expended in achieving it that the major market averages would likely sell off on the event.

And here I am -- a Dow Theory buy signal has finally been registered -- and, by my pencil, so much energy has indeed been used to accomplish it that I think the equity markets are a short-term sell.

Indeed, all of the macro sectors I follow are now very overbought. Specifically, 96% of the Financials are currently above their respective 50-day moving averages (DMAs); all of the other macro sectors have at least 80% of their stocks above their 50-DMAs, save the Telecommunication sector, which stands at 67%.

Moreover, as stated in the publication ChartWorks, in 11 of the last 15 instances, the first year in a presidential term has produced a high around the end of July (or the first part of August) and historically the August/September time frame has often been volatile for equity investors.

Further, the recent rally has been accompanied by weak volume. As the astute Lowry's service notes, "The greatest shortcoming of the rally from the March low has been the lack of volume." Lowry's goes on to observe, "Both short and intermediate term indicators of price momentum have reached levels that typically lead to market corrections." Also worth considering is that my day count sequence is now at session 21, in the typical 17- to 25-session skein, and therefore the recent rally is pretty long of tooth. Hence, I think the Dow Theory upside confirmation should be sold on a tactical, or short-term, trading basis.

Of course, this top-picking approach isn't in keeping with the moving average strategy I've been advocating recently. To wit, over the past few weeks, I've suggested that until the market average in question closes below its respective 10-DMA, all investment/trading positions should be maintained. Such a strategy eliminates any thinking given its robotic approach.

I still believe such a strategy makes sense for the more intermediate/long-term investor. To be sure, for the past few weeks I've advised more conservative types to use some sort of short-term moving average violation before reducing positions. For my purposes, I've been using the 10-DMA. In the S&P 500's case that moving average is currently at 983, while the DJIA's 10-DMA is at 9125 and the NASDAQ Composite's is at 1976.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos