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Jeff Saut, Chief Investment Strategist at Raymond James, believes investors should continue to buy the dips into year-end. He says the Dubai sell-off was overdone and could create a short-term relief rally:

Friday’s Dubai-induced selling was exaggerated by the limited audience so that sellers sold into a vacuum. Consequently, it will be interesting to see what happens the first part of this week when “The Street” returns from its extended holiday. Still, the shortened session turned out to be a 90% Downside Day. Such days are typically followed by a three- to seven-session “throwback rally” and then participants can determine if there is more to come on the downside.

Saut also notes an interesting piece of data that supports the theory that the market is not near a major top, which supports his bullish stance:

Yet as the keen Lowry’s services writes, “Over Lowry’s 76 year history, no major market top has formed without being preceded by at least several months of rising Selling Pressure. But, currently, Selling Pressure has been recording new lows in a downtrend dating from the Index’s peak in March. Therefore, absent a sustained rise in Selling Pressure, the probabilities are against the formation of a major top and favor the continuation of the primary trend higher.”

Nonetheless, there are some alarming signs developing in the markets which warrant a move into more low beta sectors.  Saut currently favors large caps over small caps as portfolio managers continue to chase performance, but do so with reduced risk:

That said, the divergences we have cited for the past month continue to mount. Most notable has been the lagging performance of the previously market-leading small/mid-cap stocks in favor of the large caps. This is what typically happens after a “run” like we have seen because portfolio managers don’t want to “bet” their jobs, which they are not when playing the large cap universe. Over the past few months we have suggested that portfolios be tilted toward large caps for this reason. We also continue to favor special situations like 5.8%-yielding, Outperform-rated Spectra Energy (SEP/$27.69).

Source: Raymond James

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