Maybe I’m Amazed

by Jeffrey Saut of Raymond James, 10/22/18

My friend and mentor Ray DeVoe use to say that going over old reports can be an exercise in humility, as you cringe while reading some errant forecast of another time. “How could I have been so stupid?” is the unsaid reaction. On the other hand it can be an ego trip, as you proudly go over some forecasts that were right on target. Then the unsaid comment is, “Why didn’t I capitalize on this more?” or, “Why didn’t I continually pound that theme, it was so obvious.” But then you realize that it wasn’t that obvious at the time, and that generally, conventional wisdom was running in the opposite direction. The reports that were off-base will not be covered in this missive, yet they seemed to be reasonable projections at the time. However, one set of reports that were correct will be mentioned only because they were so much against the conventional wisdom of the time.

So, we officially joined Raymond James in 1999. At the time stocks were soaring. Then on September 23, 1999 there was a Dow Theory “sell signal.” We wrote about it and got hammered by financial advisors as to why we had turned negative. Our response was that it was not Jeff Saut, or even Raymond James, but Dow Theory suggesting the best had been seen and discounted. By the way, we looked like an idiot as the stock market headed higher into the spring of 2000. However, the stock market peaked in March 2000 and declined by some 50% into November 2002 where stocks began their bottoming process. Said process was complete by the spring of 2003, which was when a Dow Theory “buy signal” was registered. From there the S&P 500 would gain more than 100% and we were bullish.

That Bull Run lasted into the fall of 2007 and everyone was bullish with the D-J Industrials making new all-time highs. Yet on November 21, 2007 there was another Dow Theory “sell signal” and we wrote about it again and listened to the “cat calls” from all the bullish participants. This time there was no “forereach” (no more upside like between September 1999 and March 2000) as stocks began to slide and by March 2009 the S&P 500 had surrendered roughly 56% of its value. Yet, most stocks actually bottomed on October 10, 2008 when 92.6% of stocks made new annual lows. At the time we were writing that the bottoming process had begun and on March 2, 2009 we were on Bloomberg TV saying, “The bottoming process that began in October of last year is complete and we are all in!”

More recently, after all three of our proprietary models for all of 2017 were wildly bullish in mid-January 2018, our intermediate- and short-term proprietary models flashed sell signals and we recommended raising some cash on a trading basis. The subsequent decline saw the S&P 500 (SPX/2767.78) lose about 12% of its value into the February 9, 2018 undercut low, which we told participants to buy. From there the SPX would rally 16% into early October, when our short-term models flashed another sell signal on October 2. 2018, and we advised participants to sell trading positions. While our long-term prop model flipped bullish in October 2008, and has never turned bearish since, our short- and intermediate-term models are currently conflicted. Indeed, the intermediate-term model remains constructively configured, but our short-term model is still on a sell signal. Quite frankly, our instincts told us the equity markets bottomed on a trading basis on October 11, 2018 at ~2710, but last Thursday surprised us as the SPX lost a large 62 points from Wednesday’s intraday high into Thursday’s intraday low. This has left the SPX vulnerable to further downside.