Jeff Saut continues his optimistic outlook into year-end. In his latest missive he details not only his continued micro bullish outlook, but also clarifies his stance on a common macro concern in investing circles. Saut is not worried about the major missing component in the earnings recovery – revenues. He sees the current earnings rebound as fairly typical following a major downturn:
Since Corporate America had no other lever to “pull” is it any wonder it turned to cost-cutting, which was the only vehicle left under its control. We have also argued that such cost cuts would allow any incremental pick-up in final demand to flow to bottom-line earnings. The result is that profits have exploded at the largest ramp-rate since mid-1975; and if past is prelude that profit surge should lead to an inventory re-build that drives a capex cycle that leads to a hiring cycle and then comes a pick-up in consumption. As our friends at the astute GaveKal organization opine, “Following the hiring cycle is consumption. Importantly, consumption comes on the back-end of the cycle.”
In terms of his micro outlook, Saut remains bullish into year-end. Not only will money mangers continue to drive the year-end buying, but the technicals are now aligned for further upside:
Since mid-November the S&P 500 (SPX/1106.41) has tested, and held, the 1085 level four times. Also, since the March “lows” the SPX has ALWAYS found support at the lower Bollinger Band and rallied. Last week both of those levels were “tagged” and successfully “held” (see chart). Moreover, the “tight consolidation” (<2% range) over the past four weeks has allowed our internal energy measuring indicators to reenergize, hopefully setting the stage for a decent rally. Given the aforementioned metrics, as well as the year-end performance anxiety money managers are feeling, we think the SPX is going to break out above the 1115 level so often mentioned in these missives.
These aren’t the only factors driving prices higher. Saut also sees upside surprises causing further upside:
Reinforcing those views are the good folks at Bespoke who noted, “(While) the pace of economic indicators exceeding expectations has slowed considerably, (last) week saw a reversal in this trend. Of the nine reports released, only two were weaker than expected. If this continues, the odds of breaking out of the recent range to the upside increase considerably.” Obviously, we agree.
Saut and the good analysts have Raymond James have been prescient all year. Ignore their calls at your own peril.