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Jeff Saut: Two Sectors to Watch in an Overbought Market


And how to trade them.

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.

"Bureaucrats have little incentive to improve, invest or innovate. When speculators are wrong, however, they are punished severely for their mistakes by losses of their own money... Speculators, searching for profit, send signals to producers and consumers as to the forces of destruction and good... Perhaps the most positive impact of my current-day speculators is to check at inception governmental activities that would have an inflationary impact. Governments are prone to spend more money on their activities than they take in through taxes. The consequence often has been substantial inflation, followed by war, revolution and destruction."

-- Victor Niederhoffer, the Wall Street Journal, February 1989

I recalled Victor Niederhoffer's remarks as I listened to Tom James' impassioned address at last week's Raymond James Summer Development Conference. Tom urged the US government to slow its rapid-fire approach to some key issues.

Union card-checks was first on the docket, whereby secret election ballots (like those used in national elections) would be eliminated. Plainly, such a move borders on un-American.

Second was healthcare, which while certainly in need of "fixing," should clearly not move toward the Canadian and British models. Finally was the folly of cap and trade, which any economist will tell you amounts to a huge tax on American business and just plain won't work.

It currently feels like the government is moving way too fast on its current legislative agenda, and -- while politically appealing -- it's consequently at risk of making some monumental mistakes.

Nevertheless, the stock market didn't seem to care about such things last week, as the S&P 500 (SPX) tacked on another 7% to close the week around 940, thus negating the widely advertised head-and-shoulders top formation in the charts.

The SPX also ended above its 10/30/50/200-day moving averages and in a position to challenge its June 11 closing high of 944.89. Bettering that level would suggest an attempt to achieve my long-standing target of 1050. I recently postulated this might be the case by noting that I was very impressed with last Monday's action (+185 on the Dow Jones Industrial Average). Accordingly, I recommended that trading types consider buying the index of their choice with the appropriate short-term downside hedges.

Surprisingly, that was the first trading position I've recommended in months. Even more surprisingly, it's currently profitable. In the investment account, however, I've been recommending Whiting Petroleum's (WLL) 5.8%-yielding convertible preferred. It, too, has proved surprising since my original recommendation, and I continue to embrace it -- albeit now only on weakness.
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No positions in stocks mentioned.
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