Market Direction and Stock Trends

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Jeffrey Saut: The call for this week

* December 5, 2016

Serenity now?

Recently, the S&P 500 experienced a “buying climax.” A “buying climax” is the near-term exhaustion of demand for stocks. The final surge of a “buying climax” tends to lead to an upward price spike followed by waning demand allowing prices to pause and/or pullback. We think that is precisely what happened last week. The pause has permitted the stock market’s internal energy to rebuild, suggesting the S&P 500 (SPX/2191.95) is getting close to grinding higher into our envisioned February short-term “timing point.” Indeed, the picture is clearly bullish when you look at chart patterns of the various indices. The SPX has broken out to the upside after a nearly two-year consolidation (Chart 1). Ditto on the D-J Industrials (Chart 2), and the Russell 2000 has been on a tear (Chart 3). Even the NASDAQ has broken out and, given its recent softness, has merely pulled back to its breakout point (Chart 4). And don’t look now, but the energy sector has broken out to the upside (Chart 5). Meanwhile, the economic news is getting better, and it’s not just here (link; auto-playing video). That makes S&P’s earnings estimate for 2017 of ~$131 doable; and if Bob Pisani’s comments are anywhere near the mark, stocks are not all that expensive. Manifestly, following the “profits trough” in 2Q16, earnings rebounded in 3Q16, a trend we expect to continue for the foreseeable future. Obviously, international investors, as well as U.S. investors, are beginning to sense this too. A little over a month ago, we wrote about the recommendation in a government-commissioned report for Norway’s Global Government Pension Fund (~$880 billion) to increase its exposure to equities from 60% to 70%. While they have not done that yet, it is a view many endowment and pension funds are slowly embracing. Quite frankly, it is the only way they can achieve their targeted returns. Over the weekend, another such gleaning occurred when the Finnish Pension Fund (~$38 billion) made the decision to no longer underweight U.S. equities. As for Italy’s “no” vote, as we told accounts in NYC last week, it is hard to believe it is not already “baked” into the various markets. That seems to be the case this morning with the S&P futures up some nine points.

http://www.raymondjames.com/pointofview/serenity-now

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