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Jeff Saut: Bulls Get Corralled?

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Time for a market correction may be upon us.

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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.

In Energy Sector Powers Up, I suggested equity markets were bottoming, and urged investors to accumulate stocksfor what I thought would be a pretty decent rally.

Since then, we've seen a buying stampede. Such stampedes tend to last 17 to 25 sessions, interrupted by 1- to 3-day pullbacks, before exhausting themselves on the upside. It just seems to be the rhythm of the thing: Participants' emotions turn from bearish to bullish, they bite the bullet, and buy. While it's true that a few stampedes have lasted 25 to 30 sessions, it's very rare to have one last more than 30 sessions.

In Rally Till Spring, I outlined a series of events that might act as the "carrot in front of the horse" to keep the rally going:

"Investors should gain much more clarity this week as the TALF (Term Asset-backed Securities Loan Facility) is ramped up in earnest, which might just lead to a rebound in the velocity of money. Next are potential changes to the uptick rule and the suspension/ softening of mark-to-market regulations on impaired assets.

"Then there are the G20 meetings, which could provide more positive surprises. Finally, US retail sales (excluding autos) rose a stronger-than-expected +0.7% in February, suggesting the US consumer might be stabilizing.

"That sequence could keep this rally going. Whether it turns out to be just a bear-market rally or something more remains to be seen."


I subsequently added another carrot: performance anxiety. Many hedge funds have been sitting in 50%+ cash for the year, and have totally missed this rally. Imagine the pressure they feel coming into the end of the quarter, sending out bills to their clients for just sitting on all that cash. I argued that performance pressure should put a prop underneath stocks into quarter's end as underinvested portfolio managers window-dressed their portfolios.

Well, here we are; It's quarter's end, and the equity markets have gone from severely oversold on March 6 to pretty overbought at present. Moreover, today is day 16 in the upside skein, leaving the equity markets now vulnerable to more than a 1- to 3-session pause and/or correction. That downside vulnerability should actually increase after quarter's end.

Consequently, the trick now is to keep the money we've made over the past 4 weeks. While My preferred technique: To rebalance most of the trading positions by selling partial positions and raising stop-loss points on those remaining. In the investment account, I like the idea of partially hedging long positions like SBA Communications (SBAC) by using various options strategies.
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No positions in stocks mentioned.
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