Saut: Employing Hedging Strategy, Emphasis on Decent Fundamentals, Dividends

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (December 1st):

...Ladies and gentlemen, the time to be a trader was a year ago, not here at the best valuation metrics seen in a decade. As Société Générale’s James Montier states:

“This is a value investor’s version of heaven. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy. With all these opportunities available I have never been more bullish. Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”

Even a somewhat more cautious Barton Biggs of Traxis Partners recently stated, “I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies. Stocks around the world are cheap, stock markets have been obliterated and are deeply oversold, the fabric for economic healing is developing, and we must be pretty close to maximum bearishness.”

Plainly we agree, which is why we have been recommending that accounts position themselves accordingly since the October 10th “capitulation alert.” More recently, we noted a “capitulation alert” was registered for commodities as well.

The call for this week: Last week Wall Street experienced one of its biggest weekly gains since the five-day surge that ended the great bear market of 1929 – 1932. We think the “lift” was driven by America’s new regime, as well as the Citigroup (C) bailout, which unlike the previous bailouts did not wipe out the equity holders. According to the good folks at Bespoke, however, following such skeins the markets historically have retreated the next week by 2.4%.

Nevertheless, we have had ten 90% downside days since September 2008. Then on November 24th we had a 90% upside day. Based on the 70-year history of Lowry’s data, a series of 90% down-days followed by a 90% up-day often signals the end of a bear market. Like Barton Biggs, we too don’t know when the next bull market will begin, but if the DJIA can better its November 4th high of 9625.28, and is confirmed by the D-J Transportation Average (DJTA / 3215.20) besting its November 4th high of 4071.81, it would certainly be a step in the right direction.

Whatever the outcome, we have, and continue, to treat the October 10th “capitulation lows” as a bottom for the short-to-intermediate term, until proven wrong. Still, this is the most difficult market we have seen since the 1970s, which is why we are employing a hedging strategy and continue to emphasize clean balance sheets, decent fundamentals, and dividends. We continue to invest accordingly.

Disclosure: None