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Jeff Saut: 'Tis the Season for Superior Market Performance


Mix some holiday cheer with sectors like energy, consumer non-cyclicals, basic materials, and REITs.

In past missives my firm and I have often reminded participants that since 1900 there have been only three secular bull markets. They were from 1921 to 1929, 1949 to 1966, and 1982 to 2000. Following each of those secular bull market peaks, the DJIA has been "range-bound" for a period of years.

Using the 1966 bull market peak as an example, the Dow was mired in a trading range for 16 years before embarking on the next secular bull market.

Of course, those of us that lived through the 1966 to 1982 debacle know that there were a series of bull and bear markets within the confines of that trading range. In fact, there were at least 10 20%+ rallies and/or declines in that ongoing range-bound market. Accordingly, investors had to have a more proactive strategy for their portfolios, much like we have had to use for the past number of years.

While nobody can answer our proposed question, what we can attempt to do is position portfolios in a manner that deals with the current environment as we see it. To that point, since last April we've been using the stock market's chart pattern from 2003 as a template for this rally.

Recall that the S&P 500 bottomed in March 2003 and rallied sharply into June. From there it flopped/chopped around for a few months, but never gave back much ground, and then it took off on the second leg of the rally, rising into the first quarter of 2004. The first leg of the 2003 rally was driven by liquidity, much like 2009's first leg (March to June). The second leg of the 2003 rally was driven by improving fundamentals and earnings, just like 2009's "July through now" rally.

To be sure, we've turned cautious a couple of times since the March "lows," but we've never turned bearish.

Most recently, we wrongfully turned cautious at the beginning of October, worried that the July through September upside vacuum created by the melt-up might get filled to the downside once the quarter's end window dressing was over.

Obviously, that was wrong-footed because all the markets have done is work off their pretty overbought condition at the end of September into a very oversold condition a few weeks ago.

We chronicled that oversold condition in our report of November 2, 2009, but regrettably didn't act on it. Accordingly, we corrected that cautious call last week by adding some "long" index positions to the trading account. While we would have felt better adding those positions if the markets had pulled back, or if the S&P 500 had rallied above its potential double-top of 1100, in this business you have to take what the markets give you.

Whatever the resolution in the short term, we continue to believe the major market indices will trade higher into the first quarter of 2010.

Plainly, we agree with the astute GaveKal organization in that the normal economic cycle is for corporate profits to increase, which drives an inventory rebuild and subsequently capital expenditure cycle, and then comes employment expansion that revives consumption. Currently, corporate profits are surging at their largest ramp rate since mid-1975.
No positions in stocks mentioned.
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