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Jeff Saut: Look for Markets to Bottom

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Even though China won't give any hints this week, that's the call.

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Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut.


"Unseasonably mild and clearing," was the weather forecast going into the Ides of March back in the year of 1888. And it was true, as temperatures hovered in the 40s and 50s along the East Coast. However, torrential rains began falling, and on March 12, the rain changed to heavy snow, temperatures plunged, and sustained winds of more than 50 miles per hour blew. The "Great White Hurricane" had begun! In the next 36 hours some 50 inches of snow would blanket New York City and the winds would whip that snow into 40- to 50-foot snowdrifts. Telegraph and telephone lines were snapped, fire stations were immobilized, New Yorkers couldn't get out of their homes, 200 ships were blown aground, and before the storm was over 400 people would die. The resulting transportation crisis led to the construction of New York's subway system.

We revisit The Great Blizzard of 1888 this morning because of the weather that's crippled the Northeast corridor over the past few weeks. Fortunately, communities are more capable of dealing with such storms today than they were more than a century ago. Still, the loss of productivity is likely going to be impactful in some of the upcoming economic reports.

That said, over the long weekend my firm studied the Dow Jones Industrial Average (DJIA) chart from 1888 and found that March 11-March 14 marked a bottom for the stock market. Also of interest is that today is session 18 in the envisioned "selling stampede" so often discussed in these missives. For new readers, "selling stampedes" tend to last 17 to 25 sessions, with only one- to three-day counter-trend rally attempts before they exhaust themselves on the downside. While it's true that some stampedes have extended for 25 to 30 sessions, it's rare to have one last for more than 30 days. Accordingly, we're getting increasingly interested in stocks again, and have been adding names to our "watch list."

As for Dow Theory, which my firm has often been asked to comment on over the last few weeks, so far there's no signal, at least as we were taught to interpret it. Indeed, for a "sell signal" to be generated it requires the following set up (as paraphrased by Mark Hulbert):

1.
The Dow Jones Industrial Average and the Dow Jones Transportation Average must undergo a significant correction from joint new highs.

2. In their subsequent rally attempt following that correction, either one or both of the averages must fail to rise above their pre-correction highs.

3. Both averages must then drop below their respective correction lows.

Therefore, the stage is set because the DJIA recorded its closing high on January 19 at 10725.43, while the DJTA hit its closing high of 4262.86 on January 11. Their subsequent lows came simultaneously on February 8 at 9908.39 (DJIA) and 3792.89 (DJTA), respectively. Thus, if the two indices can rally back above their aforementioned "highs," it would reinforce the Dow Theory "buy signal" generated last summer. If, however, they fail to better those highs, and then break below their February lows, a "sell signal" will be rendered. Regrettably, there's no way to anticipate such signals.
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No positions in stocks mentioned.

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