Jeffrey Saut: This Is a Critical Week

Excerpt from Raymond James strategist Jeffrey Saut's latest essay:

Consistent with our strategy of NEVER buying an entire position all at once, we told accounts to buy a one-third trading tranche last Tuesday, another one-third tranche on Wednesday, and complete the final one-third tranche on Thursday (before the long weekend) if the equity markets took another tumble. Our strategy was based on the belief that Wall Street was, "Moving the headstones around, but not moving the graves!"

 

Manifestly, over the past few weeks every time the "bears" have wanted to drive stocks lower they have trotted out rumors that Israel was going to bomb Iran and the Hormuz Straits would subsequently be closed. The result has been a surge in crude oil prices with an attendant stock swoon. To us, this constantly repeated rumor is getting pretty "worn." Still, given last week's holiday-shortened, limited audience environment, the "sellers" had a vacuum in which to sell (no buyers) and the results speak for themselves.

 

Our stance was/is that if there were no geopolitical events over the holiday weekend, participants might just return in "buy 'em mode" with an upside "buying vacuum." Plainly, these thoughts have been reflected in our verbal comments where we suggested what we are experiencing is a "raindrop bottom" whereby if you bought scaled "in" trading positions last week you might get "hit" by a few raindrops, but were unlikely to get very wet.

 

So far that stance has been generally correct, which brings us to this week.

For us, this week represents a critical week. Today is day 33 in the selling-stampede, and unless we are in "crash mode," our belief is that we are making a "raindrop bottom" on a trading basis. Yet, the situation is far from a "lead pipe cinch," for as the Lowry's organization noted in Friday's missive:

 

Major market trends in the stock market are largely reflections of the collective emotions of hope, fear or greed expressed by millions of active investors. . . . Last Friday, the DJIA finally fell 20% from its high, meaning the minimum requirement of an 'official' bear market. . . . This looked to a gaggle of analysts as convincing evidence that the bear market was over just one day after it officially began. . . . (But), several factors make it unlikely that a major market low will be formed in the near future.

 

Unfortunately, we agree with the good folks at Lowry's about the longer-term scheme of things. In fact, we are one of the few people that wrote about the Dow Theory "sell signal" registered in November 2007, which is why we entered 2008 in a cautious mode with oversized holdings of cash. Yet, we think a tradable "low" is at hand and are positioning accounts accordingly. If we are wrong, we will be stopped-out consistent with another one of our mantras, "Better to lose face and save skin!"