TIME FOR CAUTION, from Jeffrey Saut, chief market strategist, Raymond James

Since the “flash crash” low of May 6, 2010, we have had a Dow Theory “sell signal” (5-20-10), a sell-signal from my proprietary intermediate trading indicator (the first since December 2007), the monthly stochastic-indicator has turned negative, a downside violation of the 12-month moving average has occurred, most indices have broken below spread triple-bottoms in the charts, and last week we got a “death cross” when the S&P 500’s 50-day moving average (DMA) crossed below its 200-DMA. All of this suggests that a cautious stance on stocks is warranted. Indeed, of all the vehicles I monitor, only the Yen, Gold, Silver, and Fixed Income are higher for the month of June, the 2Q10, and year-to-date. That said, such extreme downside readings typically imply stocks have been too compressed on a short-term basis and consequently a rally may be in order.

SMALL CAPS FOR DEFENSE? From Ron Surz, president & CEO, PPCA

The first half of 2010 has been an overall disappointment, with both domestic and foreign markets losing value, and almost no place to hide.

As the chart below shows, large-cap US companies lost about 8% in the first half of 2010. By contrast, mid- and small-sized companies lost only 2% and 1% respectively. Smaller has been better, which is somewhat surprising given the current angst about the economy; you’d think investors would feel safer with larger companies, and those companies would attract more capital. The fact is that smaller companies have now outperformed large for the past 18 months. Smaller companies led the 2009 rally.

What do you think is the cause of this smaller company dominance? Here’s my belief. Investors perceive that larger companies are more exposed to looming pitfalls, like tax and inflation increases; “too big to fail” is no longer the order of the day. In this environment, revenue, not size, is king.


U.S. companies have been buying more than they have been selling in the U.S. stock market this year, which is a major reason we have never been more than cautiously bearish (50% short) on U.S. equities in 2010. To track corporate actions, we calculate the change in the float of shares each day as follows:

Change in Float = New Offerings + Net Insider Selling – 2/3 New Cash Takeovers – 1/3 Completed Cash Takeovers – New Stock Buybacks

The float of shares has contracted for three consecutive quarters, and it fell $48.4 billion in Q2 2010. But we think companies are buying mostly to support their stock prices rather than because they think stock prices are attractive. Insider buying has averaged only $33 million daily this year, which is extremely low on a historical basis. If insider buying were higher, we would put more weight on float change in our market call.

THE MARKET COULD GET CHEAPER, from David Rosenberg, chief economist and strategist, Gluskin Sheff

The reason why everyone bought into the V-shaped recovery view was because the equity market told them that this must be the case. Now, we have a situation where $1.6 trillion of wealth has been wiped off the books in the past three months from the stock market setback and so it’s no coincidence that at the margin, question marks are surfacing over the longevity of the recovery — if not the longevity, then certainly its veracity.

The next key event is Q2 reporting season with Alcoa kicking things off on July 12 — guidance will be even more important than ever, especially since the analysts have been busy raising their estimates for 2010 EPS to +34% from +27% at the end of March. But then again, according to Bloomberg estimates, the consensus was, on average, 13 percentage points too optimistic from 2007Q3 to 2008Q4 on their earnings growth projections … pass the salt please. There is no doubt that the combination of lower prices and higher earnings estimates has enticed the bulls into claiming that the stock market has entered into deep undervalued zone at a 12.5x P/E multiple. However, history shows that trough multiples could get as low as 10x, so there is nothing to say that the market could not get cheaper still, especially with all the uncertainty overhanging the economic outlook.

As a sign of just how much slack there is in the U.S. labor market, and how much job insecurity there really is, the number of work stoppages (there were only five strikes in the past year at companies employing 1,000 workers or more) fell to the lowest levels since records began in 1947. Just another sign of deflationary worker anxiety — makes us want to go out and buy even more fixed-income securities. In fact, that is where the massive savings pool is headed — into bonds — as the first of the 78 million boomers turn 65 next year (retirement age). 42% of mutual fund IRA money is sitting in equities as are 46% of all mutual fund defined-contribution plans (like 401(k)s). When the boomers first turned 25, the mutual fund industry had assets of $55 billion; today that number is closer to $11 trillion of which more than $4 trillion is in retirement accounts (good take on this on page B1 of the USA Today).


Tuesday, July 6:

June ISM Non-Manufacturing Index

Wednesday, July 7:

Mortgage Applications (weekly), ICSC-Goldman Retail Sales (weekly)

Thursday, July 8:

Jobless Claims (weekly), June Chain Store Sales, May Consumer Credit

Friday, July 9:

May Wholesale Trade