Jeff Saut Turns Short Term Defensive

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Includes: BTUUQ, CVX, WMT
by: Market Folly

Market strategist Jeff Saut takes a decisively more cautious tone in his investment commentary this week compared to previous notes and understandably so. The markets have seen somewhat of a precipitous decline that has many participants worried. The Chief Investment Strategist at Raymond James is currently very focused on "keep(ing) the profits accrued since the March 2009 bottom." This is definitely a defensive posture. And rather than focusing on the investment opportunities at hand on both the long and short sides of the portfolio, Saut seems solely concerned about protecting profits.

This all becomes intriguing when you consider Saut's commentary over recent weeks. Last week, Saut noted he removed market hedges during the turmoil. He was letting his protection go when he needed it most and when it was hardest to let go. Normally, that would be the right play. However, the market's precipitous decline has continued. And prior to removing his hedges, Saut argued that the market was in a bottoming process.

Now that we've come full circle, Saut highlights a few reasons to be cautious. Firstly, the market recently registered a Dow Theory sell signal (something that speaks for itself). Secondly, he cites weakening economic reports, specifically the sharp decline in the Economic Cycle Research Institute's weekly leading index. Additionally, Saut says his own proprietary indicator has registered a sell signal as well. There is one last signal he is watching for and that is the impending 'death cross' when the 50-day moving average crosses the 200-day moving average to the downside. Not to mention, a technical analysis video we recently highlighted points out a bearish engulfing pattern in the markets.

In the near-term, Saut is cautious. In the long-term, he thinks equity markets will be okay. He writes,

the yield-curve is still relatively steep, credit spreads have not leaped, the Advance/Decline Line appears steady, and earnings comparisons should remain favorable; so unless it is different this time the recent correction in the equity markets should resolve itself with higher prices.

To be honest, we're not quite sure how Saut comes to that conclusion after the barrage of negative signals and indicators he referenced earlier. Maybe he thinks the negative sentiment is overstated, who knows? Saut honestly admits he is cautious in the near-term and he's certainly not alone there as global macro hedge fund Prologue Capital outlined cause for concern as well recently. That said, Saut is still on the prowl for solid risk/reward situations. Specific stocks Saut is intrigued by currently include Chevron (NYSE:CVX), Wal-Mart (NYSE:WMT), and Peabody Energy (BTU). Saut in particular likes Wal-Mart under $50 per share due to strong fundamentals and Peabody for the 'supercycle for coal.'

Embedded below is Jeff Saut's market commentary for Raymond James:



You can download a .pdf copy here.

As mentioned before, you can view Saut's previous commentary including his removal of hedges and his call that the market was in a bottoming process. Overall though, his message is still clear: Selectively upgrade the stocks in your portfolio. This could turn out to be a big call as the market is undoubtedly at a potential turning point here with the technicals looking bearish.

Original article