December 31, 2012
by Jeffrey Saut
of Raymond James
By Jeffrey Saut
December 31, 2012
I was on Bloomberg Thursday with the always insightful anchor Erik Schatzker. The interview was going pretty well until about halfway through when Eric said:
“I’m confused, about two weeks ago we were talking about a market that had priced ‘in’ a deal on the ‘fiscal cliff’ by January 1, 2013; and, you said yourself that as of last Thursday (12/20/12) you were still thinking the same thing. At the time we were talking about going over the ‘fiscal cliff’ as an Armageddon event. Now, that we don’t think we’re going to get a big deal come January 1st, why is the market trading down a lot harder?”
I responded, “Well, I don’t think the market is trading down all that hard and I think it was the media that called it Armageddon. If you talk to a lot of the strategists on Wall Street ...”
And with that, Eric interrupted me in mid-sentence by stating, “You know, that’s not true! Jeff, I don’t mean to argue with you, but we’ve had countless guests of serious caliber here, some of the biggest investors in the world, some of the most talented hedge fund managers in the world, with long track records to prove it. And, they said it was going to be a serious event; if not Armageddon, something close to disaster. So, I wouldn’t blame it on the media.”
You can see the entire interview here (http://www.bloomberg.com/video/saut-on-outlook-for-budget-tax-agreement-T7rkONETT3m0Euo24qZKig.html#). However, for the record, in the Bible’s Book of Revelation, Armageddon means the end of the world. I thought that was supposed to happen on December 21st according to the Mayan calendar; it didn’t. I don’t think it will happen on January 1st either. Additionally, I didn’t say anything about hedge fund managers, or big investors, I said “strategists.” And, I still don’t know any strategists at the major firms that are terming the “fiscal cliff” Armageddon, which would mean the end of the financial markets as we know them.
The interview concluded with me saying, “I lived inside the D.C. Beltway and when things absolutely had to happen they have typically happened. So even if we go over ‘the cliff,’ I don’t think it will be Armageddon. There will be some kind of solution worked out in the first few weeks of January.” BTW, the first people I heard referring to the “cliff” as being Armageddon was absolutely the media.
So we wait for the alleged Armageddon for the second time in as many weeks. Actually, I think Treasury Secretary Tim Geithner best described the “cliff” when he termed it an “orchestrated drama.” And as one smart money manager writes, “We should not forget that Congress has a magic eraser. No matter what they do, with a few strokes of a pen everything goes back to effectively January 1, 2013 and the Fiscal Cliff will take its place on the great wall of media creations (remember Y2K?).” Whether you call it Armageddon, or “orchestrated drama,” there is nothing in my bag of tricks that suggests this is the beginning of a massive decline for stocks. For example, the NYSE Advance/Decline line registered a new bull market high last week. The D-J Transportation Average (TRAN/5220.98) has broken out to a new reaction high and all that happened in last week’s decline was that the Trannies pulled back to their upside point of breakout (read: support level). Then too, it is a good sign that the Russell 2000 (RUT/832.10), as well as the Transports, are outperforming and continue to remain above their respective 50-day moving averages (DMAs).
Meanwhile, European markets are up, the Chinese markets have been on fire, and even Japan has taken a turn for the better under new leadership. Recall, I tried being bullish on Japan using their small-capitalization and dividend-paying ETFs back in 2009. Initially we made some money, but ended up giving most of the profits back because I thought Japan was an investment when it turned out to be only “a trade.” One of the major things that foiled my Japanese investment recommendation in 2009 was the strength of the Yen. This time, that may not be the case. To wit, my friends at Wisdom Tree have an exchanged-traded fund (ETF) named WisdomTree Japan Hedged Equity Fund (DXJ/$36.35). The fund has a yield, but its real redeeming feature is that it hedges out much of the currency fluctuations between the U.S. Dollar and the Japanese Yen. Ladies and gentlemen, Japanese stocks are profoundly “cheap;” and as my father taught me, “Good things tend to happen to cheap stocks.” For additional information contact our ETF Research Department.
That said, in last Wednesday’s Morning Tack I stated, “There were some negative indications in Monday’s abbreviated trading session. Most importantly, the Advance/Decline numbers were negative enough to register a short-term ‘bear signal’ from the McClellan Advance/Decline Oscillator.” In Thursday’sTack I wrote, “By Wednesday’s closing bell our Short Term Trading Index had registered a ‘sell signal’ confirming Monday’s McClellan A-D signal.” Thursday’s action turned out to be more of the same with a late session recovery coming on news the House of Representatives would convene this Sunday as hope of a last minute deal sprang eternal. Still, Down Volume for Thursday’s session was 70% of total Up/Down volume and our Short-term Trading Index registered another negative signal. On Friday the selling intensified, leaving the SPX resting just above its 1390 – 1400 support level. However, the McClellan Oscillator is now in an oversold position and a Monday plunge, on no “fiscal cliff” deal over the weekend, would leave it about as fully oversold as it ever gets (see chart on page 3). Indeed, last week’s “sell sequence” of indicators (as described above) is the typical set-up for a tradable “low.”
The call for this week: The American public ought to be chanting the mantra from the 1976 hit movie Network, “I’m mad as hell and I’m not going to take it any more” (you can see that Network clip by clicking here:http://www.youtube.com/watch?v=rGIY5Vyj4YM). And, I don’t care if you are a Democrat, Republican, or Druid, what has been going on inside the D.C. Beltway is a disgrace and hurts “We the people.” On Friday, because of the shenanigans in D.C., the SPX declined from Thursday’s close of 1410.70 into a low of 1384.00. Obviously, that should have “cleaned out” all of the stop-loss orders below the 1390 – 1400 support level. That’s why early this morning the pre-opening futures are up ~5 points to 1390. If there is no deal by today’s close participants should look for a marginal “up” opening followed by attempts to sell stocks off with lower prices due by “the bell.” If there is still no deal by Wednesday, that’s when the downside washout should be complete. Accordingly, Kamikaze trading types may buy partial positions on weakness today looking to fill-out those trading positions on further weakness Wednesday. Investors, however, should be reading their “buy list” because this feels more like a downside crescendo rather than the beginning of a whole new leg to the downside.
(c) Raymond James