It's the Direction of Stock Price Movement that Counts

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, (published Monday October 12th):

“The absolute price of a stock is unimportant. It is the direction of price movement which counts.”

During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.

In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price – by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.

“Stock Profits Without Forecasting,” by Edgar S. Genstein

I am leaving for a speaking tour in Michigan and then will be out of the country speaking again, so I wanted to leave you with the above paragraphs to ponder. They are two of the most important paragraphs I have encountered in more than 40 years of studying markets. Do not read them just once. Go off to a quiet spot that invites contemplation and read them several times. Then reflect on all of the mistakes you have made in trading and investing. Bells will ring, and curses will be uttered, if you are truly honest with yourself. My advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision; especially if your emotions are reigning.

Ladies and gentlemen, Edgar Genstein’s comments are as cogent today as they were when first written in 1956. The most recent example would be the two-stage “melt up” that began on March 6th from the S&P 500’s (SPX/1071.49) demonic low of 666. The first stage took the SPX up 39.6% into its first intra-day reaction high of roughly 930. From there the index “flopped and chopped” around, but never gave back much ground. Stage two of said “melt up” began on July 13th and has extended every since. So far the second stage has tacked on 24.3% from the July 8th intra-day low of ~869 into the September 23rd intra-day high of ~1080.

While memories are short on the “Street of Dreams,” recall what many pundits were saying when stage one stuttered-stepped in May. The “cry” went out that the short-covering, bear market rally was over, and the March “lows” would be retested and broken. That mantra caused many investors to sell their investment positions and go to cash. Admittedly, we turned cautious in early May and sold, or were stopped-out, of most of our trading positions. However, we never “lost” our investment positions, consistent with Mr. Genstein’s advice.

Further, on July 14th, when we luckily recognized that stage two of the “melt up” was beginning, we recommended re-buying trading positions. Unfortunately, we sold those trading positions the week of September 21st, fearing that the vacuum created by the stage-two “melt up” might be “filled” to the downside once quarter’s-end window dressing was over. Still, we NEVER lost our long-term investment positions, again consistent with Edgar Genstein’s advice. Nevertheless, that short-term trading strategy looked pretty good as the SPX peaked on September 23rd (at ~1080) and slid into its October 2nd low of 1020 where it tested, and held, its 50-day moving average. Since then the SPX has gained 4.6%, which brings us to this week.

To be sure, this week all eyes will be focused on the S&P 500’s September 22nd bull market closing high of 1071.66. While many pundits think bettering that peak is a fête de compli, we are not so certain. As our friends at the sagacious Bespoke Investment Group wrote last Friday:

Unfortunately, the gains this week (read: last week) might make it tough to reach those highs next week (read: this week). The S&P 500 closed higher on all 5 days this week. Believe it or not, this is the first time this has happened during the current bull market. The last time we had a 5-day Monday through Friday winning streak for the S&P 500 was in November 2006, and the index declined 1.38% the next week. Over the last ten years, this has happened 12 times, and the index has gone down the next week 8 times for an average loss of 0.65%. Obviously this one piece of data isn’t enough to rest your bearish hat on, but it’s still a worthwhile piece of information to know. With the way this market is going, not many investors are willing to bet against it right now, regardless of what any data is projecting.

Plainly, we agree with “(not) willing to bet against it right now,” which is why we have not “disturbed” our investment positions.

Speaking to investment positions, since the March “lows” we have recommended numerous investments from the Raymond James universe of Strong Buy and Outperform-rated stocks. We now revisit a few of those yield-oriented, Strong Buy-rated recommendations (that still look good to us) for your consideration. To wit, Allstate (ALL/$31.92), Automatic Data Processing (ADP/$40.17), Chevron (CVX/$72.76), Digital Realty Trust (DLR/$45.73), Republic Services (RSG/$26.97), Inergy L.P. (NRGY/$30.10), NTELOS (NTLS/$17.11), Teekay LNG Partners L.P. (TGP/$25.89), and Teekay Offshore Partners L.P. (TOO/ $16.88). Of course, we would prefer to buy them on weakness, but then the equity markets are not operated for our benefit.

As for the trading account, we have been “flat” for the past few weeks, which looked like a pretty good strategy until last week’s spurt saw the SPX tack on roughly 4.5%. Consequently, if the SPX can travel above its overhead resistance between 1070 -1080, we will be forced to reconsider our cautious approach and look to add some trading positions. In the interim, we remain cautious.

The call for this week: “I am leaving for a speaking tour in Michigan, and then will be out of the country speaking again, so I wanted to leave you with the aforementioned paragraphs to ponder in my absence. They are two of the most important paragraphs we have encountered in more than 40 years of studying markets. Do not read them just once. Go off to a quiet spot that invites contemplation and read them several times.”

That said, while I continue to think stocks will be higher by year-end, I am less sanguine about the short-term. Evidently I am not the only one who is cautious, for my colleague (in a past life), market wizard Larry McMillan, sold ALL his trading positions last week, lamenting that the S&P has tried to break out above its 1070 – 1080 overhead resistance zone four times; this is the fifth time. Indeed, the S&P has expended a lot of energy in its four previous attempts to breach its overhead resistance zone. If it fails this time we could be in for the “October Ouch” referred to in last week’s letter.

Monday morning, however, the “forereach” from last week’s “win” (+4.5% basis SPX), combined with a new reaction high for the DJIA, had the pre-opening futures better by 7 points. And that’s the way it was on the session after the stock market’s two-year anniversary of its all-time closing high of 1565.15 (basis the S&P 500); be apprised...

Comments

[ThirtyNineW...:]

I think bettering the peak will be a fait accompli.

Oct 13 03:51 PM

[Mark Bern:]

"but then the equity markets are not operated for our benefit."

Bummer, Dude!

Oct 13 05:21 PM

[Albertarocks:]

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday October 12th):

“The absolute price of a stock is unimportant. It is the direction of price movement which counts.”

No shyt Sherlock! That's about as helpful as the philosophy of the great Will Rogers who said "only buy stocks that go up, and if they don't go up, don't buy 'em".

In all honesty, I think that's about the most unprofound revelation I've ever read.

Oct 14 02:39 AM

[Fabien Hug:]

As always good and usable advice. I wish you a nice trip and come back soon, your weekly comment is great help.

Oct 14 09:13 AM