Jeffrey Saut: A ‘fairly powerful up move’ is under way

The following is an excerpt from the weekly investment outlook of Jeffry Saut, the managing director and chief investment strategist at Raymond James, for the week of August 2:

Clearly the equity markets were “happy” last month, for after losing 8.2% in May, and 5.4% in June, the S&P 500 Ticker:(SPX)(1101.60) gained nearly 7.0% in the month of July. Despite the often mentioned parade of negative indictors “tripped” during the June and May mauling, I was bullish at the beginning of July, for as stated, “The equity markets are the most oversold they have been since the capitulation alert of October 2008.” Indeed, during the first week of July less than 5% of the stocks in the SPX were above their respective 50-day moving averages (DMAs), which is a VERY oversold reading.

Moreover, my sense was that second quarter earnings reports were going to surprise on the upside. And sure enough, half way through earnings season 78% of the S&P 500’s companies have bettered their earnings estimates, while two out of three companies are beating revenue estimates. My hunch is the balance of the earnings reports will do the same. The July Jump has had another endearing feature in that the three consecutive 100-point “up days” in the D-J Industrial Average (DJIA/10465.94) catapulted the Dow above its June closing high of 10450.64 last Monday. Simultaneously, the D-J Transportation Average (DJTA/4422.94) closed above its June high of 4433.60, thus registering a Dow Theory “buy signal,” at least as I interpret Dow Theory.

Ladies and gentlemen, a same day confirmation from both averages is a rare event and suggests a fairly powerful “up move” is underway. That said, Dow Theory signals often come after a significant rally (or decline) has already taken place and hence has expended a lot of energy. Also worth noting is that a number of other Dow Theorists opine an upside signal has not yet been registered. They need a close above the Dow’s April 23rd price of 11204.28, with a confirmation by the Transports above its May 3rd closing high of 4806.01, for a Dow Theory “buy signal” to be rendered. Alas, “listening” to the market is an art, not a science, and Dow Theory is interpreted differently by many practitioners.

Nevertheless, by my pencil a “buy signal” has been registered and I am a buyer on weakness with fairly close stop-loss points to manage the risk. Accordingly, that begs the question of what to buy. In past missives I have mentioned a number of stocks and mutual funds that are recommended either by Raymond James’ analysts or by our research correspondents for your consideration. On the more value vent I have used: Microsoft Ticker:(MSFT)($25.81); Intel Ticker:(INTC)($20.60/Outperform); Wal-Mart Stores Ticker:(WMT)($51.19/Strong Buy); Allstate Ticker:(ALL($28.24/Strong Buy); and Johnson & Johnson Ticker:(JNJ)($58.09/Outperform), to name but a few.

On the more “growthy” side I have mentioned: Iridium Ticker:(IRDM)($10.31/Strong Buy); NII Holdings Ticker:(NIHD)($37.46/Strong Buy); Nuance Ticker:(NUAN)($16.51/Strong Buy); and PAREXEL Ticker:(PRXL)($20.53/Strong Buy). And, this morning I am offering McAfee Ticker:(MFE)($33.10/Outperform) for your consideration.

I think McAfee’s new CFO (Jonathan Chadwick) is a decided plus for the company. As for mutual funds I have been using: MFS International Diversification Fund Ticker:(MDIDX)($11.83); Putnam Diversified Income Fund (PDINX($8.01); and OCM Gold Fund Ticker:(OCMGX)($23.97). Last week, however, in my verbal comments I offered the caveat that on a very short-term basis the McClellan Oscillator was the most overbought it has been in years and therefore a pullback might be in order. Still, as seen in the nearby chart, the McClellan Oscillator corrected some of its overbought condition last week, leaving the equity markets in a position to trade higher.

The call for this week: Since the SPX’s rally began in early July I have suggested the first upside challenges would come at the 50-DMA (currently at 1081.54) and then the 200-DMA (currently at 1114.37). The 50-DMA indeed took some time to surmount. Last week the 200-DMA also proved difficult to surpass. Nonetheless, I think it will eventually be breached to the upside, bringing into view the June reaction high of 1131. As the Lowry’s organization opines, “In summary, as the major price indexes have moved sideways since the May 25th low, market conditions have showed clear signs of strengthening, not weakening. While overbought readings on short-term indicators suggest the potential for a near-term pullback, any decline should act only as a temporary setback in the rally from the July 2nd low and is unlikely to represent the next leg of a more prolonged move lower.” Plainly I agree . . .