Selling Stampede Is Over; Tranching Into Japan

Includes: JEQ, JOF
by: Jeffrey Saut

Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, February 22nd):

...“I should have bought Walter Energy (WLT/$79.70/Outperform) at $67, or North American Energy Partners (NOA/$10.03/Strong Buy) at $8, or (insert the stock of your choice), a week or so ago” . . . was the cry on the Street of Dreams last week as the “selling stampede” seems to have bottomed in the typical 17- to 25-session timeframe.

Indeed, the climatic action of February 4th and 5th, whereby the DJIA lost 268 points on the 4th followed by another Dow Dive early the next day that reversed to upside leaving the senior index up 10 points, appears to have been the “low” we have been anticipating. That sense was reinforced last Tuesday when the NYSE experienced a 90% Upside Day, meaning that over 90% of the volume came on the upside with an attendant 170-point Dow Wow. It was the first 90% Upside Day since November 9, 2009 and was accompanied by a breadth reading of 5 advancing stocks for every 1 declining issue.

The result elicited a strong expansion in Lowry’s “Buying Power Index” (read: demand) with an even more pronounced contraction in their “Selling Pressure Indicator” (read: supply). Moreover, the DJIA has now strung together more than three consecutive sessions on the upside, which also suggests that the “selling stampede” is over. Recall that stampedes tend to last 17 to 25 sessions, with only one- to three-session counter-trend attempts before exhausting themselves, and Tuesday was session 19 in the downside skein. Accordingly, the four-day positive “pop” should be viewed as a reversal of the nearly four-week “wilt.”

Setting the stage for the stock market’s reversal has been relatively constructive economic data implying that the first revisions of 4Q09 GDP (due 2/26) are unlikely to be major, a Greek Gotcha that appears to be on simmer, a Chinese New Year that has closed their financial markets, also putting on simmer near-term worries of further monetary tightening, and a host of other Street-friendly figures.

Meanwhile, momentum traders, speculators, and model-driven players have been buying U.S. dollars, which suggests another change in the trend since stocks rallied right in the face of a stronger dollar. Even more surprising was crude oil’s spurt, as well as gold’s weekly climb, given the “buck’s bounce.” Indeed, counter intuitive as it seems given the greenback’s strength, the strongest sector last week was Basic Materials, which gained an eye-popping 5.02%.

Also of interest, at least to us since we are “long,” is that Japan’s economy expanded at a faster than expected 1.1% in 4Q09. Despite all of the negative nabobs, we continue to like Japan for a multiplicity of reasons. Apparently, so does Byron Wien, vice chairman of Blackrock Advisory Services and former chief market strategist of Pequot Capital and Morgan Stanley. According to Byron, “Japanese stocks will be the best investment among the world’s biggest markets.” He goes on to note, “Everybody who could sell Japan has sold Japan. Everyone is on one side of the boat. My view is that we have a pretty good chance of having this one be the best of the major industrial markets. It’s not a boom, but things are getting better.”

Obviously we agree and have been recommending tranching into the Japan Equity Fund (JEQ/$5.33) and Japan Smaller Capitalization Fund (JOF/$7.78). As the savvy folks at the GaveKal organization opine, if China can change its business model from one of “labor productivity” to one of “capital productivity” (to gain more efficiencies on capital), it is hugely bullish for Japan because Japan does more business with China than it does with the United States.


The call for this week: John Mauldin and I discussed the “state of the state”... John is more worried about deflation, while I remain worried about inflation. This morning, however, the equity markets don’t seem to be worried about either as gold, and crude oil, are relatively flat and the pre-opening S&P 500 futures are better by some 4 points. We think the trading lows are “in” and have tilted accounts accordingly.