Jeff Saut, the Raymond James strategist whose bullish notes we’ve highlighted several times, is starting to sound nervous. He still sees upside to the market, but like many, he didn’t like what he saw on Friday. If we could distill his message into a sentance it would be: you have to keep buying the rally, but make sure you’re not holding the bag when it pops.
Even though we spent most of last week in Manhattan seeing accounts and speaking to the media, there were some noteworthy market machinations in addition to Friday’s potential one-day downside reversal. First, the recently lagging small/mid-capitalisation stocks re-assumed their leadership role. Whether this resurgence is in anticipation of the so-called “January Effect” remains to be seen, but it is a change in the “tone” of the markets. Secondly, the D-J Transportation Index (TRAN/4101.76) broke out to a new reaction high. Third, our proprietary Advance/Decline Index is challenging its October 2009 peak, suggesting the rally is broadening out. Fourth, the NASDAQ Financial 100 Index (IXF/1960.64) continues to underperform and has failed to better its August, September, and October highs. The sage folks at Riverfront Investment Group wrote about this a few weeks in their report titled, “Financials Back to Underweight, Healthcare to Overweight.” In that report they recommended three stocks rated Outperform by Raymond James’ healthcare analysts: Abbott (ABT/$53.78); Express Scripts (ESRX/$87.02); and Johnson & Johnson (JNJ/$64.36). And finally, for the week the 10-year Treasury note’s yield rose 27 basis points, the Dollar Index rallied 1.22%, Henry Hub natural gas gained 26.8%, and gold fell some $80 per ounce from Thursday’s intra-day high to Friday’s intra-day low.
The call for this week: Since November 16th the S&P 500 (SPX/1105.98) has had a difficult time attempting to rally above the 1115 level. Interestingly, that level represents a 50% recovery of the SPX’s price decline from October 2007 (1554) into its March 2009 low (676). It also approximates the downtrend line formed by connecting the S&P’s October 2007 peak with the peak that occurred in May 2008, as can be seen in the following chart. Accordingly, a breakout above this level, with a corresponding increase in Lowry’s Buying Power Index, would be a decided positive. However, as the always insightful Lowry’s organisation points out, “From the November 9th advance through (last) Thursday’s close, Buying Power has fallen 4 points while Selling Pressure has declined 37 points. Thus, the market appears to be holding near its recent rally highs due to a lack of selling, not improving Demand.” Still, “net long” positions at professional money management firms remain in the 50 – 60% range, which is well below the 70 – 75% level reached at the October 2007 peak. That suggests the upside should continue to be favoured into year-end as the under-invested portfolio managers chase stocks driven by performance pressure, bonus pressure, and ultimately job pressure.