Crude Decline Bullish for Stocks: Rebalance & Buy on Weakness

Includes: DIA, QQQ, SPY
by: Jeffrey Saut

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


For months we have suggested crude was likely putting in a top. That “call” was driven by our sense the politicos were going to propose legislation to force the price of crude downward in front of the elections. While we think such proposals are wrong-footed, in the near term such rhetoric can be impactful; and last week oil broke below its rising trendline in the charts.

 If the slide continues, and it breaks below $120/bbl, “hot money” will think the top is “in” and act accordingly. This is the reason we have been shy of the energy complex for the past few months, as well as why we have recommended rebalancing ALL energy stocks in the portfolio. Rebalancing (read: sell partial positions) allows long-term capital gains to accrue in the portfolio, and causes cash positions to rise, giving investors the “ammunition” to take advantage of new investment opportunities as they present themselves.

 For the last few weeks we have suggested, “At such a potential short-term downside inflection point, what you need to buy are those companies/indices with the best relative strength characteristics and those with the worst relative strength characteristics. Since we already own those with the best characteristics, we have concentrated on those with the worst characteristics. Consequently, our vehicles of choice were financials and real estate.”

 The call for this week: If the decline in crude oil continues to play, it should be bullish for stocks. Indeed, just as in horseshoes and hand-grenades, all you have to be is “close” when attempting to “catch” a bottom in the stock market to make a lot of money if you adopt a scale-in buying approach, which is what we have attempted to do over the past few weeks! As stated two weeks ago, “What a great time to be an investor” for if you are a well prepared investor, volatility breeds opportunity.