On Oct. 10, 2008, with the S&P 500 at 839.80 (SPX 1,663.5), the bottoming process began when 92.6% of all stocks traded on the NYSE made new annual lows. At the time, many investors were liquidating their portfolios because they did not heed Benjamin Graham's advice in his book “The Intelligent Investor” (Collins Business, 2006): “The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.”
This year, my mantra has been that “sell in May and go away” is not going to work, as I targeted the mid-July through mid-August time frame as the first window for a meaningful decline to begin.
The SPX subsequently rallied 3.5% into its June 18 peak before resuming the decline into its June 24 low. The entire pullback encompassed 7.5%. If that pattern repeats this time, it suggests that the rally attempt that began last Thursday should peak between 1,684 and 1,696.
Personally, I don't think the SPX has the energy to make it back through my 1,684 “pivot point.” On the downside, I still think the SPX has an appointment into the 1,530 (April low) to 1,560 (June low) zone.
MY CONFIDENCE IS HIGH
Of course, I continue to think such pullbacks are within the context of a bull market since my confidence remains high that we are in a new secular bull market. I recently carried that message to Nashville where I spoke with institutional investors and spoke at events for our financial advisers and their clients.
Regrettably, most of them think you need a “feel good” environment for a bull market to exist. But, when you get that environment, it tends to be late in the game. The equity markets do not care about the absolutes of good and bad; they only care about if things are getting better or worse. And things are definitely getting better.
To emphasize that point, I always point to the American industrial renaissance, whereby manufacturing jobs are coming back to America. To wit, chemical companies are expanding into the U.S. because of our low natural gas prices. Airbus SAS just broke ground for a massive new plant in Mobile, Ala., VW of America Inc. is expanding its facility in Tennessee, Samsung Electronics Co. Ltd. is spending $4 billion in Austin, Texas, Michelin SCA is investing $750 million in South Carolina, and the list goes on.
Next is the energy independence theme, with the U.S. becoming the largest natural gas producer in the world in 2015 and likely going to be energy independent in the 2020-25 time frame. Yet most importantly, I think the 2010 midterm election marked a turning point in the political arena. Over the next five years, we are going to elect smarter policymakers and therefore get smarter policies. Unsurprisingly, for that view, I have been termed naive. I will, however, offer some quips from a recent Wall Street Journal article titled “A New Law to Liberate American Business” by Thomas G. Stemberg, founder of Staples Inc., as an example of “smarter policies.” The author begins by noting:
“There are so many government impediments to business today that the next Staples — and its 50,000 jobs — might never get off the ground. Chief among those roadblocks: the blizzard of bureaucratic red tape that buries businesses and stifles job creation.
“These include the additional 16 million hours that vending machine and chain restaurant business owners must spend complying with new food regulations each year.
“But there is also the license that magicians require to do a rabbit disappearing act, which mandates an annual fee, surprise inspections and a rabbit disaster plan.”
Wow, no wonder job creation has been slow to recover. But help may be on the way because of Sen. Angus King, I-Maine, and Sen. Roy Blunt, R-Mo. Their bill, the Regulator Improvement Act of 2010, would create a bipartisan Regulatory Improvement Commission whose purpose is to recommend cuts in the regulatory regime.
MANDATORY VOTE
Those recommended cuts would require a mandatory up-or-down, nonamendable vote by Congress. The King-Blunt concept has already worked, as seen with The Defense Base Realignment and Closure Commission, which has been responsible for the closure of 121 major military bases since 1988. As the Journal article states:
“In short, the BRAC Commission gave politicians what they crave most: cover. Nobody back home could blame them for losing a military base. The King-Blunt proposal will give representatives the same cover with regulations. “
I happen to believe that all of this is pretty bullish over the longer term. But, in the near term, I remain cautious for all of the stated reasons.
Jeffrey D. Saut is chief investment strategist at Raymond James & Associates Inc.
