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Jeff Saut: S&P Suggests Now Is Not the Time to Be Underinvested


Stocks still have room to run, even if there is a short-term pullback on deflation worries in Europe.

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Perhaps it would be a good idea to at least update its website at the same time as it confirms it has borrowed the goalseek.xls model from the Chinese department of truth.

-- Zero Hedge (June 2, 2014)

Of course, the aforementioned reference is in regards to the Institute of Supply Management's (ISM) botched report yesterday (June 2). Scarily, it took the ISM three times to finally use the right seasonal adjustment factors for its manufacturing report. When all was said and done, the third time was the charm, leaving the corrected figures pretty much in line with the median forecast. It was the "the goalseek.xls model from the Chinese department of truth" indeed. Coincidentally, there was a terrific article in yesterday's Wall Street Journal titled "Why US Manufacturing Is Poised for a Comeback (Maybe)." The article began by suggesting that more competitive labor in the US combined with lower energy costs and companies' desire to produce goods closer to their customers are the drivers of this. It was noted that China's overall manufacturing-cost advantage has "shrunk to just 4%." And, "When wages are adjusted for productivity and costs of shipping and inventories are included, it can be more economical to make some products in the US than in Asia." While China maintained the No. 1 position in foreign direct investment at $258.2 billion (up 2%) last year, the US was No. 2 with $193.4 billion (up 16%). I wrote the following in yesterday's report regarding Sasol's (NYSE:SSL) proposed project in Louisiana: "Because much of the work hasn't started yet, few appreciate the true extent of the industrialization that's about to begin. So let's put it this way, we are building a Qatar on the Bayou."

Yesterday, however, the equity markets ignored such developments and meandered through the session. In fact, after the opening sell-off, followed by the subsequent recovery, the session's minute-by-minute chart resembled that of an electrocardiograph monitor's flat-line reading of somebody who is dead! By the closing bell the S&P 500 (INDEXSP:.INX) had improved by a mere 1.40 points, notching yet another new high. The recent rally has moved the S&P into a fairly rare position in that it has left that index out above its Bollinger Band (green line).
Click to enlarge

In the past 85 years, this has only happened some 20 times and has often been the precursor to a pullback. While I do not think that is going to be the case here, it does imply a move into the multi-month target level of 1950 to 1975 is going to leave the S&P pretty stretched on a short to intermediate-term basis. Nevertheless, I think the path of least resistance remains "up" and would urge participants to look at the chart and think about how you would feel if you were under-invested or, worse, short. I think stocks still have room to run, even if there is a short-term pullback to 1900 on deflation worries in Europe.
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