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Jeff Saut: Last Week of the Selling Stampede?


Market ready for a tradeable rally.

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.

As Richard Russell noted way back in 1966, 2 factions are likely to form during a long decline in the market:

"The first is made up of inveterate bulls; these are the optimists who are waiting anxiously for the first sign of an upturn in order to climb aboard. The second team is made up of stubborn bears; as their profits on the short side grow, they are liable to grow bolder (adding more shorts) and more bearish ('it looks like it's going to cut itself in half on this one'). Both lines of reasoning are calculated ultimately to produce a single result – an explosive bear market rally; but, when is the rally coming?"

Indeed, there could be an explosive bear market rally; but when?

I have suggested the lows were likely going to come with either a whimper or a bang. Indeed, on CNBC last Monday, I said the bear case was now completely on the table. Typically, when the bear case is on the table, at least 90% of the stock market's decline is already priced into the various market averages.

The question then becomes, does the decline end with a whimper, or a bang? A bang would be a selling climax, like the one seen at the 1987 lows. A whimper might just be like the pattern seen at the 1974 stock market lows, whereby the DJIA made a selling dry-up low.

Recall the events of the 1974 bottoming sequence. President Nixon resigned in August, and the DJIA declined some 27% into its October low of 584. From there a stutter-step rally ensued that would lift the senior index 15.5% (to 675) before peaking in November. The Dow subsequently declined to a new 12-year low, which undercut the October low of 584, and in the process totally annihilated optimism by registering a new bear market low reading of 577 on substantially reduced volume (read: selling dry-up).

And that was it: The DJIA rallied into the new year, and, on January 27, 1975, a Dow Theory buy signal was rendered; the rest, as they say, is history. Worth mentioning is that the rally off the December 1974 low began as a short covering bear-market rally, but turned into a bear-market bottom that was never breached.

Whether that pattern plays this time remains to be seen, but I think the major market averages are at/close to at least a tradable low - maybe more.
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No positions in stocks mentioned.
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