Jeff Saut: This Market Is 'Unnatural'

by: Jeffrey Saut

Raymond James' Jeff Saut offers his take on the recent market action:

As for the “here and now,” we have deemed the recent performance by the major market indices to be somewhat “unnatural.” Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher.

This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally” vaulted higher without so much as ANY correction. We have suggested this phenomena was triggered by Goldman Sachs’ re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.

Following that, the Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve [SPR] until after the winter months, even though the SPR was below prudent norms. This is also a mystery to us, but once again there you have it.

Then, when it looked like the equity markets were set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC, and was granted, a mysterious reduction in margin requirements for an already over-margined hedge fund community. And that “mysterious surprise” gave the major market indices another leg-up (read: re-rally). Again, why in the world one would introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!

Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.

The current unnatural state of the equity markets continues to leave us cautious; although we have learned the hard way it is difficult to “break” the equity markets to the downside during the ebullient month of December. Consequently, our sense is that the markets will consolidate here and then attempt to trade higher into year-end. If the S&P 500 can vault above 1415, with conviction, we can see near-term objectives into the 1440 – 1445 level. While we are disinclined to play the indexes on a trading basis, we have purchased some stocks recently in investment accounts. (emphasis added)

Jeff has been around a long time, has a great track record, and is a wizened Market observer. When someone like him says that market action is unnatural, its worth considering . . .

“Dr. Doom”
Jeffrey Saut
Investment Strategy
Raymond James & Associates, December 11, 2006

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