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Jeff Saut: Are We at Another Turning Point?


March 2 was this year's game changer, but the market may be turning again as we enter 2010.

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

Winter officially begins today with the arrival of the winter solstice, which means "standing-still sun". At 5:47 p.m. (EST), the sun's rays will be directly over the southern Pacific Ocean (Tropic of Capricorn), making it seem like the sun is standing still.

This phenomenon occurs twice a year (winter solstice and summer solstice), for as Earth orbits the sun, the north-south position of the sun changes due to the Earth's changing tilt. The dates of maximum tilt to the Earth's equator correspond to the winter and summer solstice.

In these latitudes, most people frame the winter solstice as the shortest day of the year. The quid pro quo is that the French consider it the longest night of the year!

No one is quite certain how long ago humans recognized the winter solstice and began heralding it as a turning point, but a turning point it is since the sun will set a minute or two later each day from here into the summer solstice (June 21).

While the winter and summer solstice have marked the turning points of the annual cycle of the year since Neolithic times, this year's stock market turning point came the week of March 2; and we were bullish.

Since that time, investing has been pretty easy. To wit, given the fact that the equity markets were at generationally oversold levels (three standard deviations below norms), all you had to do was invest in the riskiest assets you could find and wait for things to regress to the mean (read: normalize).

To be sure, in March investors gleaned that the financial system wasn't going to implode into another Great Depression and began to buy stocks. That sense was sparked when authorities made it clear there would be no more Lehman Brothers and flooded the system with liquidity, which drove the first leg of rally.

We have often spoken of that leg, comparing it to the 2003 bottom whereby the S&P 500 (SPX) bottomed in March and rallied sharply into June. From there it chopped around into August, but never gave back much ground, before beginning "leg 2" of the uptrend that carried the SPX higher into the first quarter of 2004.

The first leg of that affair was driven by liquidity, while the second leg was spurred by improving fundamentals. If that sounds familiar, it should because it's eerily similar to what we're currently experiencing.

As we approach 2010, however, things could become more difficult, requiring stock selection, as well as market timing, to produce decent portfolio returns.

So what makes us think things are going to become more difficult in the New Year? Obviously, the 68% rally from the intra-day "lows" to the recent intra-day "highs" has reduced some of the "margin of safety" that Benjamin Graham spoke of in his legendary book The Intelligent Investor. Yet, there are other headwinds. To name a few, we'll lose some of the "sugar high" from the stimulus monies, taxes are likely to rise, there will be more government intrusion into corporate America, earnings comparisons will become more difficult, inflation should start to pick up, which should raise interest rate fears, there will be election worries, and the US dollar should continue to strengthen.
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No positions in stocks mentioned.

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