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It's All About Perspective

June 25, 2012

The string of bad economic news continued last week with 10 of the 16 economic reports coming in worse than expected; four were in line, but only two came in above estimates. While that was better than the previous week’s pathetic parade of releases, it is still far from being good. 

—Jeffrey Saut, Managing Director, Raymond James & Associates

June 25, 2012

Plainly, the past two weeks’ stock market action has been impressive as bad news has been ignored for the first time in two months. For example, the string of bad economic news continued last week with 10 of the 16 economic reports coming in worse than expected; four were in line, but only two came in above estimates. While that was better than the previous week’s pathetic parade of releases, it is still far from being good. Nevertheless, most of the indices I monitor moved higher again last week (second week in a row). In fact, the only indexes in my universe that fell were the S&P MidCap 400 (MID/920.26) and the S&P SmallCap 600 (SML/430.25). Of the major indices the D-J Industrial Average (INDU/12767.17) faired the best by gaining 1.70% and in the process broke above its 50-day moving average (DMA) at 12752.37. This was the first close above its 50-DMA since the decline began in earnest on May 4th and should therefore be viewed constructively. It also lifted the SPX above its overhead resistance between 1335 and 1340 so often referenced in these comments. Still, to match the INDU move the SPX will have to better its respective 50-DMA at 1348.45. As for sectors, last week’s most winning sectors were Telecommunication Services (+3.11%) and Energy (+2.47%). Regrettably, however, the two week rally has left no sectors currently oversold and Consumer Staples, Telecommunication Services and Utilities pretty overbought. Similarly, the NYSE McClellan Oscillator is overbought (see chart).

Since the SPX’s June 4th “low” of ~1266, I have repeatedly opined that I am treating said low as a daily/intermediate-term low even though the violation of my 1290 pivot point caused me to suspend the program of recommitting some of the cash raised between February and April. As stated, “In this business it’s better to lose ‘face’ and save ‘skin’!” And clearly the decline of ~11% exceeded my expectations of a 5% - 8% affair. That’s why investors need to have the discipline to adapt to whatever is happening in the various markets. But, what inevitably happens when a portfolio begins to erode, investors are told, “No one can time the market; and it is time in the market not timing the market.” Or, “If you miss the 10 best days in the market, your investment returns fall significantly.” Of course, investors are never told that if you miss the 10 worst days your returns swamp the return of investors who stayed the course and rode the “ups,” as well as the “downs.” Now I admit, n-o-b-o-d-y can consistently “time” the market on a daily or a weekly basis; yet, there are numerous indicators that tell us when we should be aggressive, and when we should be defensive. Those indicators are what caused us to raise cash every spring for the past three years. Moreover, you can pretty much count on me to sell 25% – 33% of any portfolio position if it is up 100% to rebalance that position; and, I don’t really care if the gain is long-term or not. You can also count on me to take some kind of defensive action (sell, hedge, collar, etc.) when something goes against me between 15% – 20%. Indeed, avoiding the big loss is the key to better returns in the markets.

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