Raymond James strategist Jeff Saut has been bullish-but-cautious in recent weeks, but now he’s throwing caution into the wind, it would appear.
Time is running out for the bears, he declares.
As for the equity markets, after being constructive since the end of June, I turned cautious exactly two weeks ago as we approached last April’s price “high” on the D‐J Industrial Average (INDU/11118.49). The senior index stood at ~11200 back then and changes hands around the same level today. However, over the past two weeks we have experienced weakening relative stock strength and numerous distribution days. Additionally, the U.S. dollar has stabilised and the 30‐year Treasury bond yield has surmounted 4% (both bearish events). Despite those deteriorating metrics, stocks just don’t seem to want to spill into the 5% ‐ 8% correction I have been anticipating. While I have not given up on a downside correction, I must admit if it doesn’t happen soon, time may be running out for the bears. Indeed, this week begins the best six‐month period of the year for stocks (November through May); and with 3Q10 earnings reports beating estimates by 71%, as well as 4Q10 earnings guidance rising, underinvested portfolio managers are experiencing intense performance anxiety. That anxiety should cause them to “flinch,” and buy stocks, if a correction doesn’t arrive soon.
Adding to that performance anxiety is an improving economy, for as my friends at the invaluable Bespoke Investment Group write: “(Last) week’s economic data contributed to further improvement in our Economic Indicator Diffusion Index. As shown in the (nearby) chart, the 50‐day rolling net total of better than expected economic reports hit a level of +15 this week. This is the highest reading since early February, and hardly an indication of the economy going downhill.”
Here’s that Economic Indicator Diffusion Index, and it’s definitely worth paying attention to. The fact is, when econ numbers come in better than expected, stocks tend to rise, and it’s reasonable to assume that the relative increase in the number of “beats” has been a major contributor to the recent rise.
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