Jeff Saut: Time to Throw Deep?
"Hail Mary" approach makes a comeback on Wall Street.
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.
Back in the late 1980s a newspaperman visiting the Oakland Raiders football training camp in California had just returned from the Jack London Historic Monument. He read a sample of London's prose to the Raiders' colorful quarterback, Ken "The Snake" Stabler:
"I would rather be ashes than dust! I would rather that my spark should burn out in a brilliant blaze than it should be stifled by rot!
I would rather be a superb meteor, every atom of me in magnificent glow, than a sleepy and permanent planet. The proper function of a man is to live, not to exist. I shall not waste my days in trying to prolong them. I shall use my time."
The newspaperman asked the quarterback, "What does this mean to you?"
"Throw deep," said Stabler!
"Throwing Deep," the "Long Bomb" and the "Hail Mary" are all phrases usually associated with football. It's the spectacular play with the possibility of a quick score, as opposed to the Woody Hayes three-yards-and-a-cloud-of-dust "grind it out" strategy. "Throwing Deep" is also an attitude, and emotion, that has recently reappeared on Wall Street.
Indeed, a mere seven weeks ago the S&P 500 (SPX) retested its January 2007 "low" of 1270, traumatizing participants into inaction as the threat of "financial contagion" echoed down the canyons of Wall Street. I, however, was bullish, opining that said retest would be successful and the ensuing rally would carry the averages above their respective February "highs" into mid-May, where a "trading top" should occur in the 1420-1440 zone (basis the SPX). From there, I suggested, a decline would commence that should be measured by "if" the U.S. economy spills into recession (I still doubt it); and then by if the recession would be short and shallow or long and deep.
Isn't it amazing how fear has morphed into greed in a mere seven weeks? For now, the cry on the "Street of Dreams" is about the new bull market that has emerged! I, on the other hand, have turned cautious.
My caution centers on the belief that the U.S.' economic problems are not all behind us: The Dow Theory "sell signal" of November 21, 2007, the double-top chart configuration of the SPX at 1560-1570, and "the snake;" except in this case we are not referring to Kenny "The Snake" Stabler, but rather the 20-month moving average (MMA) (aka "the snake") that has often represented the demarcation line of bull and bear markets.
As can be seen in the following chart, the 20-MMA tends to mark the difference between the "bull" and the "bear." When the SPX is above its 20-MMA, stocks are in an "up" phase. Even when "the snake" is marginally violated to the downside, but then quickly recaptured to the upside, the bull trend remains in force. However, when it is violated decisively to the downside, and stays there, caution is warranted.
Click to enlarge
Clearly, "the snake" has been decisively penetrated to the downside. Even the past seven-week rally has done nothing more than bring the SPX back toward the belly of it. While I'm certainly hopeful this will be a false technical breakdown. For the past eight years, whenever the "hair" on my neck has been standing up, like it is now, I've tended to err on the side of caution, consistent with Warren Buffett's two rules of investing: 1) Don't lose money; and rule number 2) Don't forget rule Number One!
Yet another observation has me worried, that being the price action in crude oil. I'm old enough to remember a similar sequence of events that occurred in the 1990-1991 timeframe. Like now, the price of crude oil was surging and smart money was selling crude oil short around its then double-top of $24 per barrel.
Fundamentally those short sellers were right; oil was clearly overpriced. But then the Persian Gulf War began and in a mere two months oil spurted from $17/bbl. to more than $41/bbl. Long-time readers of these missives know that I'm always respectful of price action. And while crude is currently fundamentally overpriced, its price continues to elevate. Whether this means another geopolitical event is in the works is unknowable, but crude oil should not be doing what it is doing and it worries me!
Consistent with these thoughts, I'm recommending rebalancing energy positions in portfolios (read: selling partial positions to bring weightings back in-line with the portfolio's original objectives). While longer-term I remain bullish on energy, crude oil is currently 37% above its 200-day moving average, a level that has historically suggested it is well overbought and due for a correction barring some unforeseen geopolitical event. That said, we're increasingly bullish on the oilfield services complex, believing that the huge cash flows accruing to the exploration and production oil companies (E&P) will result in increased capex spending.
Bolstering that view has been unusually bad weather in the Gulf of Mexico this spring, where high winds and choppy waters have curtailed contract awards. Over the past week ocean winds have "laid down," however, and my sense is contract awards will start to flourish. I think this will make pleasant reading for oilfield services companies like Cal-Dive (DVR) and Superior Energy (SPN), both of which broke out to the upside in the charts last week. As for the recent "financials fascination," like the E&P complex, I'm currently shy of financials after their spectacular rally, driven by the belief that their problems are all in the rearview mirror. I don't believe it; Hello AIG (AIG), whose Friday revelations shocked Wall Street participants. As repeatedly stated, I think that after 28 years of financial deregulation the financials are now being re-regulated, which implies a crimp in their profit margins with an attendant P/E multiple compression. And that, ladies and gentlemen, is why I've avoided the financials.
So what should we do? Well, my trading strategy has been to sell trading positions into strength on any rally above 1420 (basis the SPX). This is especially true now that I've entered my cluster of trading-top "timing points" in the May 7th – May 14th timeframe.
If you followed that advice, you have "lost" (read: sold) two-thirds of your trading positions and raised stop-loss points on the remaining one-third. As for the investment account, I remain an opportunistic buyer of fundamentally sound, favorably rated, dividend yielding, hopefully non-economically sensitive situations on price weakness as they approach support levels in the charts. In past missives I've recommended names like 7.7%-yielding Alaska Communications (ALSK), 6.3%-yielding Embarq (EQ), as well as Schering-Plough's (SGP) 8%-yielding convertible-preferred "B" shares; SGP is still favorably rated by our correspondent research affiliates, as is 3.8%-yielding General Electric (GE).
Also this morning we offer for your consideration, even though it is currently rated Market Perform by our fundamental analyst, 11%-yielding LINN Energy (LINE) with a stop-loss point of $18.57, which is its recent reaction low. Additionally, the dry bulk shipping complex is worthy of consideration given the recent strengthening shipping surveys, and rising Baltic freight rates, which suggests emerging markets remain strong. Verily, my favorite "country play" over the past few years has been Brazil, whose bourse has broken out to the upside in the charts. However, for bulk shipping ideas, I defer to my correspondent research affiliates along the lines of DryShips (DRYS).
The call for this week: Sometimes you "throw deep," and sometimes you "grind it out." I was cautious entering 2008, fearful of a "selling stampede," but turned bullish at the late January "lows." I was cautious again at the February "highs," suggesting that a re-test of the January "lows" was in order, but became aggressively bullish at the subsequent downside re-test of those January "lows" in March, believing said retest would be successful and that the ensuing rally would carry the major averages above their respective February "highs."
Regrettably, once again I'm "grinding it out" (read: cautious) now that we have rallied 12%, entered my cluster of topside "timing points," and traveled into my upside target zone of 1420-1440. Indeed, it's not the snake you see that bites you!
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