Saut: Cautious on Markets in the Short-Term

Includes: DIA, QQQ, SPY
by: Jeffrey Saut

Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, March 21st):

...[I]t is not really the threat of earthquakes that keeps me cautious on the stock market. Despite the fact that we still have not had more than three consecutive down days since September 1, 2010, and therefore the Buying Stampede remains intact, I can’t shake the feeling it actually ended on February 18. If that subsequently proves correct, we are at session 20 of a Selling Stampede.

Recall, stampedes (both up and down) typically last 17 – 25 sessions before they exhaust themselves. A few have extended for 25 – 30 sessions, but it is rare to have one last for more than 30 sessions. Indeed, previously the longest stampede chronicled in my notes was a 52-session upside skein, of course that is until the September 2010 to February 2011 affair, which-- if ended on February 18-- was legend at 117 sessions. If not, today is session 137 in the upside stampede.

Another thing that keeps me cautious is that the U.S. is going to find it increasingly difficult to finance its enormous debt given that our primary lenders are going to need more of their capital at home. Think about it, the Chinese are now running a trade deficit, the Japanese are going to have a huge “call” on their capital, Europe is facing larger and larger bailouts for the PIGs, the petro-dollar nations (Middle East) are trying to buy-off dissidents, and the Federal Reserve is slated to stop QE2 in June. Unless the Martians start lending us money, it is difficult to see how our cost of capital is not going to rise...

While I remain cautious on stocks in the short-term, I am steadfast in my two-year belief that the equity markets are in an “up” phase for reasons often scribed in these reports. Last Friday the insightful folks at Minyanville gave me yet another reason to be constructive. To wit:

“The current myth is that it is ‘all one market.’ This was true from ~2005 to 2009 (according to the DeMark Indicator) in what people called the ‘grand reflation’ or ‘reflation trade’ and subsequently went bust. All stocks, virtually all risk assets really, had identical DeMark counts. If you covered up the name and price of the stock, and nearly all commodities, it was impossible to tell what you were looking at. They all looked alike, which in my universe is the same as saying correlations went to 1.0, which is what happens during bear markets. At the onset of bull markets the correlations break down and things begin to diverge once again. That has been happening for over a year now. It is not apparent in indexes due to their capitalization weighting, but in individual stocks it is. People now treat every company as if it were AIG or Lehman Brothers. But some companies actually have good business models and are making money despite the ongoing housing collapse and economic stress.”

...As for the stock market, for weeks I have suggested that any correction should be contained in the 7% - 10% range. On cue, the SPX declined 7.06% from its intra-day high of 1344 to last week’s intra-day low (1249), begging the question, “Is that it?” While I would like to think so, I just don’t believe it since we have had two 90% Downside days and two nearly 90% Downside since the February 18 high. However, that opinion could change if the SPX can hold above 1280 combined with a 90% Upside Day.