Jeff Saut: We're Just Half Way Through A Typical "Selling Stampede"

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Raymond James strategist Jeff Saut — who, to his credit has nailed the runup and the recent swoon — remains bullish, but again warns this week that you shouldn’t get greedy in this moment of market turmoil.

It should be noted, however, that in the summer of 2008 the leverage in the financial system was far greater than it is today; and, the derivative “spider web” that had been knitted into balance sheets was legend. As the brainy GaveKal folks observe, “Almost every financial market participant is now operating with far less leverage and there are risk managers looming behind every equity
and bond trader.” Accordingly, we think the odds of another post-Lehman type of meltdown are de minimis. Further, we believe the decline that began on January 20th is merely the normal correction everybody has been looking for since July. Buttressing that view is the fact the advance/decline line is firm (read: the breadth is still good), the number of new annual lows on the NYSE is not
expanding, the yield curve remains steep, none of our proprietary intermediate indicators have rendered a “sell signal,” and the list goes on. All of this suggests the cyclical bull-market is still intact and stock prices should find support at, or above, the 200-day moving average (DMA), which is currently at approximately 1013 basis the S&P 500 (SPX/1073.87). Moreover, readers of these
missives should not have been surprised by the recent stock slide. Indeed, we have repeatedly written about how the first few weeks of the new year are littered with examples of “head fakes,” both
on the upside and the downside. As well, history shows early January is also littered with “trading tops.” Therefore, we counseled for caution upon entering 2010 and we have the hate mail to prove it.

The call for this week: Potentially, today is session 9 of a selling-stampede, which has often been chronicled in these reports. Recall that such stampedes tend to last 17 to 25 sessions, with only one- to three-session counter-trend rallies, before they exhaust themselves on the downside. The January “stock sprawl” has left all of the averages we follow down year-to-date, as well as below their respective December “lows,” thus evoking Lucien Hooper’s warning, “If the December low is violated any time in the first quarter of the new year, watch out!” Accordingly, we remain cautious.

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