Jeff Saut’s most recent strategy note reflects our opinion that the latest wave of selling is no reason to panic and run for your bunker.  After turning cautious early in the year Saut now says the market is likely half way through a 17-25 day “selling stampede” before it resumes its uptrend.  Based on strengthening credit markets and overall improving fundamentals Saut still thinks the Lehman vacuum is likely to be filled before the rally is over:

“we believe the decline that began on January 20th is merely the normal correction everybody has been looking for since July. Buttressing that view is the fact the advance/decline line is firm (read: the breadth is still good), the number of new annual lows on the NYSE is not expanding, the yield curve remains steep, none of our proprietary intermediate indicators have rendered a “sell signal,” and the list goes on. All of this suggests the cyclical bull-market is still intact and stock prices should find support at, or above, the 200-day moving average (DMA), which is currently at approximately 1013 basis the S&P 500 (SPX/1073.87).”

Using the 2003/2004 rally as a playbook Saut says we are in the middle of a near-term correction before the rally continues.  He says the market should find its footing near a 10% total decline from the peak:

“Recall, the SPX bottomed in March 2003 and rallied. The first leg of that rally peaked in late-May/early-June. From there, stocks flopped/chopped around, but never really gave back much ground. Then stage 2 of the rally began, which carried stocks higher into January 2004. The first leg of that 2003/2004 rally was driven by liquidity, while the second leg was spurred by improving earnings and fundamentals. If that sounds familiar, it should, because that is pretty much the sequence we have seen since the March 2009 “lows.” If that pattern continues to play, it calls for roughly a 10% correction and then a resumption of the rally.”

But his bullish longer-term thesis doesn’t mean he is jumping back into stocks now.  Saut is waiting for the selling stampede to play itself out and would only become more worried if we break the December low:

“The call for this week: Potentially, today is session 9 of a selling-stampede, which has often been chronicled in these reports. Recall that such stampedes tend to last 17 to 25 sessions, with only one- to three-session counter-trend rallies, before they exhaust themselves on the downside. The January “stock sprawl” has left all of the averages we follow down year-to-date, as well as below their respective December “lows,” thus evoking Lucien Hooper’s warning, “If the December low is violated any time in the first quarter of the new year, watch out!” Accordingly, we remain cautious.”

Read Saut’s full piece here.

Source: RJ