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Jeff Saut: Surviving the Selling Stampede


At session 14, of 17 to 25 possible sessions, we remain cautious.

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

Who framed Roger Rabbit?!" ... except in this case I'm referring to Roger Blough. Return with me now to those thrilling days of yesteryear. The year was 1962, John Kennedy was President, and Roger Blough, the then-CEO of US Steel, had signed an agreement with President Kennedy not to raise prices. However, just four days later he raised steel prices right in President Kennedy's face. The outraged president went after Blough, and when he tried to argue his point, Jack Kennedy stated, "My father told me that all steel men are #@Q&%!"

The battle lines were thus drawn; government contacts were switched from US Steel in favor of companies that didn't raise prices, and with that governmental incursion into corporate America, the Dow Jones Industrial Average (DJIA) shed 26% in just six weeks.

Fast forward to today. The major banks have paid outsized bonuses right in the "face" of President Barack Obama; and, it appears he's gone after them. Accordingly, the stock market has gone into the dumper, as can be seen in the attendant chart (for the record, I'm neither Republican nor Democrat; so stated before I get another onslaught of hate mail).

Click to enlarge

Whether the 1962 analogy continues to fit remains to be seen, but it's a very interesting comparison that participants should ponder since we continue to believe the markets are in "selling stampede" mode.

Recall that selling stampedes tend to last 17 to 25 sessions, with only one- to three-session counter-trend rallies, before they exhaust themselves on the downside. It just seems to be the rhythm of the thing in that it appears to take that long before everybody gets bearish enough to jettison their stocks and make a decent tradable low. While it's true some stampedes have lasted 25 to 30 sessions, it's rare to have one extend for more than 30 sessions.

Therefore, my firm put blinders on to last Friday's late-day upside reversal, consistent with our mantra of "never on a Friday." That mantra was learned from numerous Friday head fakes implying that markets rarely bottom on a Friday once they're into a downtrend. Rather, participants tend to go home over the weekend, brood about their losses, and show up the following week in "sell mode."

So, while the markets may attempt to build on Friday's late reversal, we have little confidence that any rally will last more than one to three sessions because today is only session 14 from the trading top of January 19. That said, the equity markets are pretty oversold; and, our proprietary indicators do indeed suggest that a rally attempt is due.

Last Friday's reversal was likely driven by the fact that the various averages have corrected approximately 10% since history shows that in the first year of a "bull move" it's rare to see much more than a 10% correction. Consequently, the psychology of an underinvested portfolio manager goes like this: "The typical bull market lasts three to five years, so any correction is for buying."

While my firm certainly hopes that is the way it plays, we remain suspect this is the first leg of a new secular bull market. Rather, we think it's just another bull move within the context of the range-bound stock market we've been mired in for the last 10 years.

Another driver of Friday's reversal could have been the break below 10,000 on the DJIA, which is also a psychological support level that should be respected. Then too, the White House's statement that the Health-Care Bill is probably dead may have triggered a positive response from the equity markets. Nevertheless, we doubt the political maneuvering is over on health care. However, the loss of political momentum inside the Beltway is amazing and potentially worrisome for the markets.

Be that as it may, many of the exchange-traded funds we monitor tested, and held, their respective 200-day moving averages (DMAs) last week, which could be yet another reason for a rally attempt.
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No positions in stocks mentioned.

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