Saut: Sell Financials, Gold; Some Buy Ideas

by: Jeffrey Saut

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

...So what should we do from here? If the typical pattern continues to play, traders should look for a 2½-5 session rally off of the recent lows, and we’ve already had two of them, so traders should look to sell rather than buy. Following the envisioned 2½ -5 session “lift,” there should be an attempt to sell stocks back down and potentially retest last week’s lows. Historically, 70% of such downside retests are successful. In this case, however, we think the odds are near 100% that the trading lows are “in” for the year. Short-termers, then, should scale-sell strength in the aforementioned ETFs and wait to see how the market’s “internals” look during any subsequent pullback attempt.

As for the financials, we think they should be SOLD, except for some very select special situations, on the premise that their fundamentals are not all that better even following the proposed bailout. Moreover, our sense is there will be a huge number of lawsuits regarding the potentially illegal maneuvers employed by the government to “save” select financial institutions.

Ditto, we think gold is a “sell” in the short term since after last week’s geometric rally, history suggests taking some profits is in order, as well as the fact that investors’ attentions should now turn back from gold to more conventional equities. Longer term, however, we continue to think the yellow metal is in a secular bull market...

...Consequently, while traders may trade the wiggles, investors should stick with those sectors where the fundaments look decent whether the economy slides into recession or not, preferably situations with dividend yields. As stated last week, the healthcare and food sectors (including agriculture investments) look better than most in this regards. Similarly, defense and homeland defense’s prospects appear favorable, as do our themes of water, electricity, infrastructure, select special situations; and now that the Olympics and Paralympics are over (Paralympics ended 9-17-08), China’s factories should crank back up implying “stuff stocks” (energy, timber, base metals, etc.) should fare better going forward.

And don’t look now, but after the drubbing many of the emerging markets have taken, year-to-date, scale buying of them seems appropriate (we use mutual funds for this allocation and overlay them with select country ETFs). Some individual names for your consideration that are rated favorably by our fundamental analysts include: Johnson & Johnson (NYSE:JNJ), Alaska Communications (NASDAQ:ALSK), Harris Corporation (NYSE:HRS), EMBARQ (EQ), Cogent (COGT-OLD), Covanta (NYSE:CVA), Linn Energy (LINE), and perhaps the best business model there is, Automatic Data (NASDAQ:ADP).