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'Churn! Churn! Churn!'
by Jeffrey Saut of Raymond James,
Equity markets are churning slightly above their topside 'breakout' levels, having pierced previous reaction highs. That begs the question, 'is this an upside breakout or an upside fake out?' It is indeed an upside breakout, and there should be more upside to come. In fact, if we get through the next few weeks without some kind of major pullback, you are going to start hearing about the strong upside seasonality of November and December.
QE II Set To Sail, But How Soon?
by Scott Brown of Raymond James,
In its September 21 policy statement, the Federal Open Market Committee indicated that it was 'prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.' The key part of that phrase is 'if needed.' Growth and inflation are both too low for the Fed's comfort, but are they low enough to force the Fed's hand? Most officials appear to be leaning in the direction of further quantitative easing, but it's unclear when it will happen.
'Rules are Rules?!' (An Email From Grandma)
by Jeffrey Saut of Raymond James,
Last week most of the major stock market averages broke out of their May-September trading ranges to new recovery highs (small cap indices did not). While we are not necessarily looking at a repeat of the 2009 stock market rally, the S&P 500's April highs now seem achievable. Meanwhile, the bears continue to growl 'Where's the volume?' The reply to that question is that the whole 2009 rally came on declining volume, as did this year's May mauling, begging the question: Does volume really matter?
A Long Recovery Road
by Scott Brown of Raymond James,
It's well known that recessions caused by financial crises tend to be more severe and longer-lasting, and the recovery process is typically lengthy. In a 'typical' recession, consumers postpone purchases of homes and motor vehicles. As the economy recovers, you get a slingshot effect as that pent-up demand comes back into play. However, that's not going to happen this time. The key element in this recovery is time. Fiscal and monetary policy can help limit the downside, but there's no miracle cure. Ultimately, the recovery is dependent on the private sector.
Mr. Energy
by Jeffrey Saut of Raymond James,
According to Dow Theory, the primary trend of the stock market is 'up.' That upward trend would be reconfirmed if the Dow Jones Industrial Average and the Dow Jones Transportation Average break above their respective August 9 closing highs of 10698.75 and 4516.35. Such action would also suggest a run toward the Dow's April 26th closing high of 11205.03. Last week, however, stocks stalled around their August recovery highs. With 75.8 percent of the S&P 500's stocks above their 50-day moving averages, we are currently overbought.
The Fed Outlook: No Good Choices
by Scott Brown of Raymond James,
In his semiannual monetary policy testimony to Congress in July, Federal Reserve Chairman Ben Bernanke said that the Fed 'remains prepared to take further policy actions as needed.' In his Jackson Hole speech on August 27, he outlined possible steps the Fed could take, including expanding its holdings of longer-term securities, but cautioned that 'the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs.'
And a Partridge in a 'Pair' Tree
by Jeffrey Saut of Raymond James,
We've gone from double-dip to double-drip. While the economy is slowing, a slide back into recession is unlikely. Chances of deflation have also deflated. Meanwhile, last week the Labor Day Indicator sounded the 'all clear' signal when the S&P 500 closed higher over the four days following the holiday. Unless the S&P violates its 50-day moving average of 1085, followed by a break of 1060, the path of least resistance for stocks remains up. Still, investors continue to shun stocks, leaving the equity risk premium exceptionally large.
Mr. Market?
by Jeffrey Saut of Raymond James,
There have been two 90 percent upside days in the past few weeks combined with new highs in Lowry's buying power index and new reaction lows in the selling pressure index. Since 1940 there has never been an instance when such a configuration existed five months into a bear trend; and note that we are now five months from the April highs. Additionally, over the last 16 midterm elections the stock market has never made a new reaction low post-election day. If stocks rally during the week after Labor Day, the odds that the rally will continue are high.
August Jobs Report ? No Sign of a Double Dip
by Scott Brown of Raymond James,
As with most of the recent data reports, the August employment report was consistent with a near-term slow patch in economic growth, but not a double-dip. Private-sector growth in nonfarm payrolls remained positive, and figures for the previous two months were revised higher. However, while the job numbers were better than expected, the pace is nowhere near where we'd like it to be.
Looking Further Into The Job Market
by Scott Brown of Raymond James,
The job market has been a critical focus in the economic recovery. People tend to concentrate on net employment figures (overall payroll gains or losses). However, there's a lot going on under the surface. The underlying details hold the key to why the economic recovery is going to be gradual.
Boston!
by Jeffrey Saut of Raymond James,
While the various markets can certainly do anything, it's typically not the snake you see that bites you; and currently the media is replete with stories about the Hindenburg Omen. When so many people are asking the same 'Hindenburg Omen' question, it is typically the wrong question. Meanwhile, the equity markets have been see-sawing, buffeted by deflationary worries from the bond market. The counterpoint to those lower bond yields is copper, which has broken out to the upside in the chart, suggesting no economic double-dip.
Crowded Trade
by Jeffrey Saut of Raymond James,
Equity markets remain mired in a wide-swinging trading range. In such an environment, stock selection, combined with the ability to sell mistakes quickly, should be the key to portfolio performance. There are also reasonable investment alternatives to the sidelines.
How Much of a Threat is Deflation?
by Scott Brown of Raymond James,
The Federal Open Market Committee voted to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in long-term Treasury securities ? which will keep the level of its security holdings steady over time. By itself, the Fed's decision is not a major move. Long-term interest rates were already very low. The move signals, however, that the Fed could do more if needed. Outright deflation is not likely, but it could result from a more substantial downturn in the overall economy. The Fed's latest move should prevent the economy from weakening a lot more.
'Promised Land?'
by Jeffrey Saut of Raymond James,
Last week investors gave up on stocks, worried that Wednesday's 90 percent downside day marked the end of the summer rally, and fearing that another big decline was in the offing as we enter the dreaded months of September and October. While statistically those months tend to be the worst of the year, that wasn't the way it played last year, and it is doubtful that it will play out again that way this year. While the equity markets may pull back, none of the characteristics that mark a major 'top' are currently in place.
The Fed Policy Outlook - Further Efforts?
by Scott Brown of Raymond James,
The economic data of recent weeks has confirmed that the recovery has hit a soft patch. Overall growth still appears to be positive, but the pace has slowed. Downside risks to growth have increased. Meanwhile, the Fed has spent much of the last several months working on its endgame. One part of that, reducing its holdings of mortgage-backed securities, could be accomplished gradually over time, by simply letting securities mature. The Fed may decide this week to use these proceeds to buy more mortgage-backed securities. This would be a small step, but it would be symbolically important.
'Don't Worry, Be Happy'
by Jeffrey Saut of Raymond James,
Listening to the market is an art, not a science, and Dow Theory is interpreted differently by many practitioners. Nevertheless, evidence suggests that a buy signal has been registered. Three consecutive 100-point up days in the Dow Jones Industrial Average catapulted the Dow above its June closing high of 10450.64 last Monday. Simultaneously, the Dow Jones Transportation Average closed above its June high of 4433.60.
Clear as Mud
by Scott Brown of Raymond James,
The details of the GDP report suggested what many had already suspected ? that the recovery has slowed. The personal savings rate rose in 2Q10, consistent with near-term restraint in consumer spending growth. Inventories rose at an even faster rate in the second quarter, and while these data will be revised, the pace is unsustainable, consistent with a near-term moderation in manufacturing. There's nothing in the report to suggest a double-dip, however, just a near-term slowdown in the pace of growth.
The Fed's View
by Scott Brown of Raymond James,
Federal Reserve Chairman Ben Bernanke will testify on the Fed's semi-annual Monetary Policy Report to Congress this week. This is usually a big deal for the markets. However, there's much less suspense this time around. The Fed's views were already included in the minutes of the June 22-23 policy meeting. Fed officials lowered their projections of near-term growth and inflation, and about half saw the risks to their growth outlooks as tilted to the downside. However, policymakers felt that the shift in the near-term outlook did not warrant stimulus.
Don't Bet the Farm!
by Jeffrey Saut of Raymond James,
Following the 90 percent downside days of June 22nd, 24th, and 29th quickly came a 90 percent upside day. On July 13th another 90 percent upside day was registered. Such sequences often mark the beginning of a rally. If so, the bulls' case would be dramatically bolstered with a decisive move above the SPX's 200-DMA at ~1112, with a subsequent confirming upside breakout above the June 21st intra-day reaction high of 1131.23. Until this occurs, Jeffrey Saut is content to remain flat in trading accounts, yet continue to position favorable stocks for investment accounts.
Animal Spirits and the Economic Outlook II
by Scott Brown of Raymond James,
The U.S. economic recovery appears to have entered a moderation phase, where growth is likely to remain positive in the near term but may not be as strong as was hoped for a few months ago. Recoveries from financial crises take time. This was never expected to be a sharp recovery and improvement in the labor market was projected to be very gradual. Recoveries are never smooth, but it seems clear that consumer and business psychology will play important roles in the near term.
A Man Lived by the Side of the Road ...
by Jeffrey Saut of Raymond James,
Currently, the question du jour is whether the economy is going to slip back into recession; aka ...the dreaded double-dip. While there is always the chance of a double-dip, they are pretty rare. Interestingly, all three double-dips since 1880 were characterized by a mild first recession followed by a more severe secondary recession. Plainly, what we experienced in the 2007 ? 2009 recession was anything but mild. Accordingly, the odds of another recession are low. There is always the risk, however, that we will 'talk' ourselves into a recession.
Animal Spirits and the Economic Outlook
by Scott Brown of Raymond James,
Near-term economic expectations have softened over the last few months and the risks to the growth outlook have become tilted more to the downside. There's nothing to suggest that a double-dip recession is imminent or even likely over the next few quarters. However, the one element that's hard to get a handle on is psychology. Fears of a double-dip could become self-fulfilling if enough firms stop hiring.
Happy Birthday, America!
by Jeffrey Saut of Raymond James,
Since the 'flash crash' low of May 6, 2010, we have had a Dow Theory 'sell signal' (5-20-10), a sell-signal from my proprietary intermediate trading indicator (the first since December 2007), the monthly stochastic-indicator has turned negative, a downside violation of the 12-month moving average has occurred and most indices have broken below spread triple-bottoms in the charts. Last week we even got a 'death cross' when the S&P 500's 50-day moving average (DMA) crossed below its 200-DMA. All of this suggests that a cautious stance on stocks is warranted.
'Getting, Keeping, Losing!'
by Jeffrey Saut of Raymond James,
From one main goal, keeping the profits accrued since the March 2009 bottom, springs many daunting questions. Is this a new bull market or a secular bear market? What should one glean from economic reports? What signals should one watch for? Jeffrey Saut explains a quote from _The Slippery Slope of Wealth_ by George Gilder and provides his commentary and call for the week.
Random Musings From a Summer Vacation
by Jeffrey Saut of Raymond James,
The debate of the day centers on whether what we have experienced since the March 2009 'bottom' is just a rally in an ongoing bear market or the beginning of a new secular bull market. Since the end of 2001, Jeffry Saut has been adamant that there is a secular bull market in 'stuff stocks' (energy, agriculture, metals, water, electricity, cement, etc.), especially 'stuff stocks' with a yield, as well as a bull market in emerging and frontier markets. The rest of his portfolio is geared toward taking advantage of the various mini-bull/bear market 'swings.'
Excessive Fiscal Tightening ? A Major Worry
by Scott Brown of Raymond James,
Studies of past recessions show that downturns associated with financial crises tend to be more severe and longer-lasting, and have gradual recoveries. Studies also point to a common error made in these recoveries - that is, policy is often tightened too soon. Chairman Bernanke is a student of the Great Depression, so the Federal Reserve seems unlikely to make that mistake. However, there is a growing public mood to do 'something' about the federal budget deficit. While well-intentioned, excessive fiscal tightening is bad economics.
Inflation Expectations
by Scott Brown of Raymond James,
The Federal Open Market Committee's expectation that economic conditions are likely to warrant exceptionally low levels of the federal funds rate "for an extended period" is conditional on three things: low rates of resource utilization, subdued inflation trends and stable inflation expectations. Economic growth is not expected to be strong enough to push the unemployment rate down significantly, the trend in inflation is likely to remain benign, and despite some worries about accommodative Fed policy and large federal budget deficits, inflation expectations are also likely to remain low.
Be Water, My Friend!
by Jeffrey Saut of Raymond James,
As the old sailor's axiom states, you can't change the direction of the wind, but you can adjust the sails. Clearly, the stock market's 'winds' have been in a downdraft. Last month was the worst May for the S&P 500 since 1962. Granted, the May Melt could have been worse if the SPX had stayed at last Tuesday's low of 1040.78, but most oversold indicators are about as compressed as they ever get. This week markets will have to deal with yet another disappointment after BP's failed top-kill operation in the Gulf. The best strategy now is thus defense, until the 'sell signal' reverses.
The Recovery Marches On...
by Scott Brown of Raymond James,
Real GDP rose at a 3.0% annual rate in the revised estimate for Q1, down from 3.2% in the advance estimate, although the story didn't change much. This was the third consecutive quarterly increase in real GDP. More importantly, the economy appears to be transitioning to a more sustainable recovery, less reliant on the shift in inventories and the government's fiscal stimulus, and supported more by consumer and business demand. Job growth, a key element in a sustainable economic recovery, has returned. Unfortunately, the economy still faces a number of headwinds in the near term.
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