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Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, February 14th):

I was on the West coast last week seeing institutional accounts and speaking at various seminars. The resounding question served up was, “Is this a rally in a bear market, or a new secular bull market?” The follow up question was, “How can you be sure that the pullback, you have wrongly been expecting, is for buying?” Speaking to the second question first, since 1940 there has never been more than one 10% or greater pullback in a bull move; we had a 17% pullback last year between April’s high into June’s low. Moreover, the retail investor is nowhere close to fully embracing this rally, which is typically what occurs around intermediate/long-term stock market “tops.”... I think any pullback is for buying.

As for the first question, I have not wavered in the belief that since the first Dow Theory “sell signal” of September 1999 the major averages would do what they have done after every secular bull market peak – they would go sideways in a wide swinging trading range. My often mentioned example has been the trading range between 1966 and 1982 following the previous secular bull market that began on June 13, 1949 and ended on February 9, 1966. That wide swinging trading range market experienced no less than 13 swings of 20% or more (both up and down) during that 16-year range-bound environment.

Interestingly, while the DJIA made its nominal price low in December 1974 at 577.60, the D-J Transportation Average refuse to confirm with a like new reaction price low (read: non-confirmation). That left the Dow’s nominal price low at 577.60, a level that would not be breached, or even retested, over the subsequent years. The Dow’s valuation “low” (the cheapest it would get in terms of price to earnings, price to book value, price to dividends, etc.), however, was not reached until the summer of 1982. Still, the senior index NEVER came anywhere close to its nominal price low of December 1974.

Accordingly, for almost two years I have argued that the nominal price low for the current range-bound stock market came in March of 2009; I have also stated that I would be shocked if the major averages ever come close to those levels again. As for when the valuation “low” will occur is certainly a fair question, but my sense is it is still a few years away. Yet, that does not mean you can’t make money in the stock market, as has been demonstrated by our Analysts’ Best Picks list, which has outperformed the S&P 500 in nine of the past 10 years of a range-bound market.

As for the shorter term, today is session 113 of the longest “buying stampede” I have ever seen. To be sure, a stampede typically last 17 -25 sessions, with only one- to three-day pauses/pullbacks, before resuming its upward onslaught. A few have lasted 25 – 30 sessions, but I can count on one hand those that have extended for more than 30 sessions. Previously, the longest such skein encompassed 52 sessions. The current stampede began on September 1, 2010, at the intra-day Dow low of 10016, and has continued higher into last Friday’s closing price of 12273.26 for an eye-popping 22.5% surge. Over that timeframe the senior index has not experienced anything more than a one- to three-day pause/pullback; truly an amazing run. Some internal dynamics have changed, however.

To wit, the “winners” of late 2010 (gold, bonds, emerging markets, etc.) have been having difficulty this year. Meanwhile, the “step children” of late last year (developed markets, banks, technology stocks, etc.) are acting fairly spunky. The banks’ outperformance began in November 2010, as noted in these missives, and concurrent with the first buy recommendation I have made on them in some 10 years (please see our Investment Strategy commentary of November 8, 2010). There has also been a rotation out of small capitalization stocks into larger caps. All of this is generally consistent with my cautious (not bearish) stance coming into the new year; that is “consistent” up until February 1st, when the stock market seemed to take on a life of its own.

The call for this week: “The last shall be first, and the first last,” so says the Bible (Matthew 20:16). And, that seems to be what’s happening on Wall Street this year as the favored trades of 2010 have become the least favored trades recently. Of course that has been part of the restless rotation that has sparked many of the upside non-confirmations on which I have been commenting. It is also responsible for my cautious investment stance since history suggests that upside non-confirmations are a reason for caution. And with interest rates backing up, the yield on the 10-year T’note is above its 200-week moving average for the first time since 2007; it will be interesting to see how the Financials act this week. Without the Financials rallying it should be difficult for stocks in the aggregate to extend higher.

Source: Saut: Cautious Stance as Winners of 2010 Become the Least Favored Trades