Jeff Saut has basically been a bull all year, and for the most part he’s been on the right side of things.
But it seems that even he’s starting to get a little nervous about this rally:
As stated, the stock market is pretty overbought with 77.6% of the S&P 500’s stocks more than one standard deviation above their respective 50-day moving averages (DMAs). The McClellan Oscillator is also overbought. Then there is my day count sequence, which shows the S&P 500 (SPX/1176.19) standing at session 32 in the current up move without anything more than the perfunctory 1 – 3 session pause and/or correction. Typically such buying stampedes exhaust themselves in 17 – 25 sessions. A few have lasted 25 to 30, but it is rare to see one extend for more than 30 sessions. Therefore, I am turning cautious, but not bearish, believing any correction will be mild and followed by higher prices.
All that being said, he sees reasons why the surge can keep going:
Recall that many mutual funds close their “books” in October, putting even more performance pressure squarely in the “cross hairs” of portfolio managers. Moreover, the potential sentiment-changing midterm elections are also acting as a “carrot in front of the horse.” Consequently, to an underinvested PM, the past few months’ upswing in stocks has been a nightmare. That said, the equity markets are currently overbought and my sense is we could see a short-term “peak” in stock prices between now and post the November elections. Still, I think any pullback will be mild followed by higher equity prices. So again I say, “I think it is a mistake to get too bearish despite ‘death crosses,’ Hindenburg Omens, Roubini revelations, and Prechter plunges.”