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Jeff Saut: Homesick

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September is a historically weak period for stocks, but that doesn't mean the world is coming to an end.

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In 1986, Stan Salvigsen, Michael Aronstein, and Charles Minter left Merrill Lynch to form the money management firm Comstock Partners.

Thus began some of the best, and most colorful, economic/equity research Wall Street has known. I still vividly remember one of their initial reports, "That Ain't Mud on Your Boots, Partner." The trifecta were among the first to predict the massive decline in interest rates.

Unfortunately Stan passed away at 53 and was unable to realize how terrific that call would prove to be. Recent cries from select pundits that the real estate/housing recovery is over reminded of Comstock's report titled "Homesick. Those cries have echoed down the canyons of Wall Street for weeks, but seemed to hit their zenith when last Monday's new home sales were much weaker than expected. Indeed, the median forecast was for sales of 430,000 homes on a seasonally adjusted annualized rate, yet the actual number was 412,000.

Remember, however, there is a large level of uncertainty in the monthly figures. July sales were reported as -2.4% +/- 11.9% - meaning that we can be 90% certain the true monthly change was between -14.3% and +9.5%. As our economist, Scott Brown Ph.D. writes, "That is, the reported decrease in July is not statistically different from 0%." Also, note that the median sales price is dependent on the mix of homes sold (regional strength, high-end vs. low-end, etc.) and is not a good measure of home prices in general. Despite said uncertainty, the spin masters trumpeted those numbers prove the Housing Hurray is over.

I was just with some of the folks from GaveKal and was fortunate enough to discuss various strategies that have allowed their mutual funds to outperform respective benchmarks. I also opined that given their views on an improving real estate market (I agree), and my views on a healthy automobile market, it seems remote that the US economy will slide back into a soft economic spot. Plainly, that's what the equity markets are sensing as they continue to ignore the obviously worsening geopolitical environment. Combine that backdrop with the 11.7% 2Q14 earnings growth, and the 6% revenue-per-share gains, and is it any wonder the equity markets remain perky?

Does that mean we won't get a 10%-12% pullback? Of course it doesn't! Everyone knows it is coming, they just don't know when. As stated, I thought there was a high degree of probability such a decline had begun in July, but after falling through its first support zone (1940-1950) the S&P 500 (SPX/2003.37) stayed above its secondary support zone of 1890-1900 and re-rallied to a new all-time high. Too bad the same cannot be said for the D-J industrials (INDU/17098.45), or the D-J Transports (TRAN/8408.02), causing one Wall Street wag to exclaim, "Can you spell non-confirmation?!"

The call for this week: Mark Twain once said, "OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."

But the truth is, the month of September has the worst track record. So we enter the month of September, which since 1928 has experienced an average decline of 1.07%. It has seen gains a mere 45.3% of the time. That said, the August 11, 2014 traders' "buy signal" we identified was reinforced when the SPX broke out above its previous support zone, which then became the overhead resistance zone of 1940-1950, and traded to a new reaction high.

This morning, the SPX preopening futures are higher by 4 points despite Putin's Prose about being able to take Kiev in a fortnight and his reminder that Russia is a major nuclear power. To me, it is pretty eerie our markets can ignore such rants.
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No positions in stocks mentioned.
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