The following is an excerpt from the commentary of Jeffrey Saut, chief investment strategist and managing director of equity research at Raymond James & Associates, for Monday, Aug. 27. To read the full commentary, click here.
Unfortunately, many investors failed to participate in this summer's rally, conditioned by the shared experience of the past two summers. Indeed, for the last two years the S&P 500 (SPX/1411.13) has topped out in the spring and then slid into the summer doldrums. Accordingly, many professional investors were too timid to believe the June 4th low was the daily, and intermediate, term cycle-low, which launched this year's summer rally. Now they are faced with performance anxiety as the end of the third quarter looms. Yet investors are still skeptical, voicing concerns about Euroquake, a slowing China, our dysfunctional government, the fiscal cliff, etc. I have addressed most of these concerns in prior missives. Nevertheless, the single most reoccurring “knock” I have heard since the bull market began in March 2009 is that the volume has been extremely low by historical standards. In theory that “knock” makes sense, but followers of said theory have missed out on the ninth strongest Bull Run in the history of the S&P 500.
This week, volume will not be the question du jour as participants put on “rabbit ears” for what is said at the Jackson Hole meeting. Indeed, the Kansas City Federal Reserve will again host the annual Federal Reserve meeting near Yellowstone National Park with the highlight being Ben Bernanke's Friday morning speech where Wall Street will be looking for hints of future policy moves. Recall, I was wrong-footed at the last Fed meeting thinking there would be a change in Mr. Bernanke's policy statement. My reasoning was that the Fed would change its policy statement on fears it would be viewed as too political by changing its policy statement at the September meeting, which is so close to the presidential election. Accordingly, this week's Jackson Hole's affair may be the last chance for the Fed to act. That said, while the economic figures have strengthened over the past few weeks, last week this pattern did not hold. Whether that will cause Ben Bernanke to lean toward another quantitative easing should be the focus of the week. If QE3 is the “call,” the SPX should vault above the previous reaction highs of 1420 – 1422 with price objectives of 1477 and then 1509. If not, it likely implies the indices will have to spend more time digesting the ~12% rally from the June 4th low.
Whatever the outcome, I think any correction will be shallow with the path of least resistance remaining to the upside with the “carrot in front of the horse” being the under-performance by the pros staring at the end of the quarter performance derby. Manifestly, most investors I know are dramatically underperforming the major indices.
Last week, however, the under-invested crowd got a break as the SPX snapped its six-week winning streak. This should have come as no surprise after the SPX's first attempt to travel above its April highs failed. As stated, it usually takes two, or even three, attempts before a successful upside breakout occurs. Also, as anticipated, the pullback was shallow, indicating the bulls are still in control; and while the momentum has been lethargic, there are no clear-cut bearish divergences that typically occur at topping formations. Indeed, at a “big top” the Relative Strength Index (RSI) will diverge and fail to confirm new reaction highs in the broad averages. Furthermore, the leading stocks continue to lead. Typically, if a top is forming, the leaders lag and the laggards lead and that is just not happening. All said, the picture looks pretty good with the stock market's daily internal energy level back to a full change. That puts the SPX in great position to vault above the 1420 – 1422 level and keep pushing higher.
As for my comments on gold last week, gold looks to have broken out to the upside, and in the process has traveled above its 200- day moving average. To me, this looks like the start of a move higher and not the end of a move. Coincident with gold's upside breakout, Credit Suisse penned a report on Freeport-McMoRan Copper & Gold (FCX/$36.13) with a favorable rating. The report's byline reads, “The cheapest growth stock in our universe.”