Tuesday, June 2, 2015

Keeping An Open Mind

We've used this space many times to advocate the importance of always keeping an open mind when trading/investing.  Today is another one of those occasions and the motivation comes from two of our favorite market commentators currently offering up two very different near-term views.

First, Jeff Saut, the esteemed Chief Investment Strategist for Raymond James, continued yesterday with his long held stance that stocks look poised to move higher.  Saut has been saying for years, and so far correctly, that we are in the early-mid innings of a long-term secular bull.  And more immediately, he believes the market has been gathering steam over the last several months to make yet another meaningful push to the upside:

The call for this week: Last week the “secular bull market” theme came into question for the umpteenth time since our “bottom call” of March 2009. The latest boogie man has been the D-J Transportation Average (TRAN/8299.75), whose upside non-confirmation we have discussed ad nauseam since its occurrence last December when the Trannies failed to confirm the new all-time highs in the Dow. Unfortunately, many of the indices I follow failed to extend their upside breakout to new all-time highs recently. Nowhere was this more glaring than with the D-J Industrials (INDU/18010.68), whose upside non-confirmation by the Transports widened even more last week. Indeed, the Trannies extended their breakdown below the 8520 – 8580 support zone and in the process the 50-day moving average (DMA) fell below the 200-DMA (the death cross). Still, the Industrials have not fallen below their respective support level. The same can be said for the SPX as it continues to reside above the 2090 – 2100 level. Lost in the technical trauma has been the improvement in earnings’ revisions (see chart on page 3). This morning the preopening futures are marginally higher on no over the weekend news. I continue to think the SPX is organizing itself for a move higher as long as the 2090 – 2100 level is not breached.

Mr. Saut has been consistent with this opinion for many months and believes that as long as the S&P 500 can maintain above the recent support zone it's created for itself, then eventually it will rally higher. This from his Morning Tack piece today (emphasis ours):

Well, as stated in the last lines of yesterday’s missive, “This morning the preopening futures are marginally higher on no over the weekend news. I continue to think the S&P 500 (SPX/2111.73) is organizing itself for a move higher as long as the 2090 – 2100 level is not breached.” My models suggest the anticipated upside may be delayed until this Friday, or until early next week, but that it is coming. If the “call” is wrong, I will say it is wrong and adjust accordingly, but until then I am sticking with that rally theme.

We highly recommend you make his comments a part of your daily reading.

Somewhat counter to Saut's calls for a near term move higher, Convergex's Nicholas Colas in his market briefing today titled "Warriors, Come Out to Play", calls U.S. equities "brittle" and notes that the S&P is up only 2.6% year to date and all of that gain has come since April as Q1 was a washout. He goes on to assert that (again, emphasis ours):

Valuation of 18x current year earnings means domestic stocks are priced for perfection in a distinctly imperfect world: negative revenue growth for multinational companies, increasingly negative earnings comparisons, and a domestic economy stuck in (at best) first gear. Yes, central bank liquidity from Japan and Europe may well push global equity markets higher.  But what we really need is a pullback – that classic 10% correction that flushes out weak hands, reestablishes the discipline of “Risk” in the “Risk-Return” equation, and shows capital markets how to do more than just follow central bank liquidity.  So watch June’s price action in U.S. stocks very carefully, because this process needs to start now.  The bull market that began in March 2009 is now an ancient bovine indeed.  After all, better 10% now than 20% or more later in the year.  The first is inconvenient.  The second is unwelcomed. 

Mr. Colas then uses the ancient Greek story of "Anabasis" and the cult classic movie "The Warriors" to serve as analogies for what he believes may be the best course of action for stocks in the near term. In each story, victory was achieved by first making a successful retreat away from overwhelming odds.  He closes with:

Either way, investors should remember that sometimes a small retreat on your own terms is better than a long march to the sea.

While he is not predicting that a 10% fall will happen, he is suggesting that, given the facts, a pullback of that nature should and deserves to happen soon.  Yet, he nor Jeff Saut nor us, know what the market has in store for investors next.  And that fact circles us back to keeping an open mind. Saut makes that point even more clear by stating it in his bullish market call.  We love the fact that while he has an obvious bullish bias, he gets out in front of the risk that he'll be wrong and is willing to "adjust accordingly."

That is the critical point here and something with which many (most?) investors struggle.  The ability to admit to being wrong.  Jeff Saut is one of the most tenured and respected minds on Wall St., a guy whom at this point gets a pass for making a bad call, and yet here he is making sure that everyone knows that success in this business demands flexibility and the ability to be wrong and move on.

It's perfectly fine to develop investing biases and to settle on an expected outcome however if you're not willing to admit when the market has proven your bias wrong, you and your portfolio are in trouble.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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