Saut: Bullish on Gold, Cautious on Crude, Focused on Agriculture

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (May 18th):

...[L]ast week’s action set up the potential for a more enduring decline than what we have seen since the March lows. Accordingly, we think participants should reduce / hedge their exposure to early-cyclicals, which have outperformed since our “buy ‘em” call of March 2nd.

We also think those freed up funds should be shifted to agricultural investments. In past missives we have mentioned numerous investment vehicles, which have rallied nicely, like 9%-yielding Archer Daniels Midland convertible preferred “A” shares (ADM, A/$33.54), and 6%-yielding Bunge’s convertible preferred (BGEPF/$78.00) both of which followed on a research basis by our affiliates.

We continue to embrace the agricultural theme and have added the exchange-traded fund [ETF] iPath AIG Live Stock Total Return Index (COW), as well as 3%-yielding Claymore Clear Global Timber Index (CUT), to stocks for your consideration.

Additionally, Congressman Waxman appears willing to give away credits to industries in support of the “climate change” bill. This should be a positive for electric utilities. While we don’t like the utilities right here for numerous reasons, their dividend yields, and geographic positioning, make some of them worth consideration.

Our caution on the utilities stems from the interest rate complex, where the 30-year Treasury bond has broken down in the charts (read: higher interest rates), leaving the yield above 4% for the first time since November 2008. Indeed, on April 29th the long bond broke below its 200-day moving average [DMA], thus completing what looks to be a massive top formation. Surprisingly, because higher interest rates should be supportive of a firmer U.S. dollar, the Dollar Index has also broken down and continues to reside below its respective 200-DMA.

Meanwhile, gold has traced out what appears to be a giant reverse head-and-shoulders bottom in the charts; and, we remain bullish. To be sure, bonds, the dollar, copper, and crude oil remain supportive of the “reflation trade.” We have been bullish on crude oil since its mid-January “price lows,” believing crude oil was making a bottom. We are still bullish, but would note that after its rally from those mid-$30s “price lows” in January, to its recent high of around $60, crude is now extremely overbought in the near-term. Consequently, we would be more cautious on crude oil stock positions; and, would actually consider hedging some of those positions to protect their gains.

The call for this week: ...[L]ast week felt like a trend change to me with the S&P 500 (equal weighted) losing more than 8%, the Russell 2000 surrendering some 7%, and the D-J Transports shedding nearly 9%. Moreover, Thursday was a 90% Downside Day. As the Lowry’s service notes, “A likely key factor in determining the extent of a market pullback in the weeks ahead would be the occurrence of additional 90% Down Days. Thus far, in the rally since mid March, 90% Down Days have been isolated events, quickly followed by a renewed uptrend.

However, a series of 90% Down Days could indicate the sort of sustained, heavy selling consistent with a deeper and more sustained market set back.” And, as the always insightful Helene Meisler writes, “Keep your eyes on the Russell 2000 since it is the only index that has rallied back to the underside (or just about) of its broken channel line. A failure here would confirm my view that we’re in the midst of a correction.”

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Comments

[Fred Voetsch:]

I think you've got it right this time.

May 19 12:31 PM

[AndrewBaker:]

Agreed: we're very close to the correction that is overdue. Hot air can only keep the balloon up for as long as it stays hot, and the air we've been seeing recently is just decidedly stale, and the balloon itself is starting to look faded and old!

May 19 02:32 PM