“The human mind is our fundamental resource.” – John F. Kennedy

News & Resources

Listen Strategize Advise Implement


Investment Strategy
by Jeffrey Saut

Retests, Recessions, and Rallies

January 14, 2019

Recently, much has been written, and said, about a retest. The reference is about the major indices pulling back to their recent December closing lows, creating a double-bottom in the charts. In the case of the S&P 500 (SPX/2596.26) that would mean a pullback and retest of the December 24, 2018 closing low of 2351.10. As often written, our sense is that is not going to happen given the sequence of events the equity markets have been through over the past three months. Moreover, as we have also written:

You know we came into 2018 in full bullish mode with WAY too many bulls and everyone expecting the 2017 "bull run" to be repeated in 2018. This year we came into 2019 with WAY too many bears believing the equity markets are going to crash. Folks, last January the Fed was in tightening mode while investors were wildly bullish. This year the Fed appears to not be in that mode and investors are wildly bearish.

Speaking to all the talk about the U.S. falling into recession, I see no evidence that will occur anytime soon barring some kind of black swan event. Many recession pundit predictors point to the yield curve, referencing an inversion of the 2-year T'note to the 5-year T'note, or the 2-year T'note to the 10-year T'note. To us, these are the wrong yield curves. During our 48 years in this business the correct yield curve has always been the 90-day T'bill to the 30-year T'bond and it is nowhere near inversion. Junk bond spreads, while they have widened, remain tighter than they have been prior to recessions. The Leading Economic Indicators (LEI) have always peaked months before the start of a recession and the LEI is still rising. Household debt-to-disposable income has declined, incomes are rising, corporate balance sheets are strong, the Present Situations Index - which has telegraphed every recession - is still rising, and the list goes on. Accordingly, I just do not see why so many folks are thinking a recession is coming.

Turning to rallies, as previously written:

"You know we came into 2018 in full bullish mode with WAY too many bulls and everyone expecting the 2017 'bull run' to be repeated in 2018. This year we came into 2019 with WAY too many bears believing the equity markets are going to crash."

It feels to me like EVERYBODY sold in December looking for lower prices to put that money back to work. Typically, the equity markets are not that accommodative. My sense is prices are going to trade higher, forcing that sideline cash back into stocks into the end of January. And then, if there is going to be a pullback attempt it likely comes in February. Since the washout low in December there have been two 90% Upside Days, meaning 90% of the total up to down volume traded has come on the upside. Moreover, Advancing versus Declining issues has been strongly bullish with the same kind of 90% Upside Days, which resulted in a rare Upside Breadth Thrust. Further, the Buying Power Index is getting ready to cross above the Selling Pressure Index. Such a sequence usually implies the lows are in. As Lowry Research writes, "Overall, this combination of heavy selling followed by even stronger Demand appears to offer, according to the Lowry Analysis, a textbook example of a market bottom." It also strengthens my sense that we are in a "buying stampede." As often noted, such stampedes typically last 17 - 25 sessions with only one- to three-session pauses and/or pullbacks. If correct, today would be session 13.

My current thoughts on the equity markets were summed up better than I could write by the invaluable Bespoke Investment Group in their insightful weekly The Bespoke Report. To wit:

Santa was a few weeks late this year but the rally he eventually delivered after Christmas Eve lows is as strong as any rally he delivered during December of years past. Even more impressive than the uptick in equity markets has been the massive surge in credit, where spreads have plunged over the last two weeks. Bonds, loans, and everything else in sight has been hoovered up and helped to support the move upwards in equity markets. Adding to the tailwinds for the US specifically has been the easing off of pressure from the US dollar, interest rates, and perhaps ultimately the Federal Reserve. The Fed has taken a dramatically dovish turn in response to collapsing equity markets, slowing the pace it expects to tighten at this year. Interest rates have also fallen, driven by both the Fed and the risk aversion else-where in financial markets. As a result, housing activity is picking up and likely to keep doing so, giving a second negative feedback to market chaos that might otherwise cause a recession. When it's all said and done, it's not clear how fast the current pace of buying can continue, but earnings season brings a new focus for investors as it starts in earnest next week.

The call for this week: I thought the SPX rally from the December 24 "washout low" was likely going to run into the overhead resistance zone of 2600 - 2650. Last week's intraday "print high" was 2597.82, which did indeed stall the rally. We doubt the SPX can better that level in the short term. The S&P 500 Index formed an Outside Day on Thursday with a high of 2597.82 and low of 2562.02. There was not enough energy to push the S&P 500 index above 2600, so the S&P 500 had an Inside Day on Friday. Traders will be sensitive to the S&P's Friday high (2597.75) and low (2577.40) and even more reactive to the S&P 500's high and low from Thursday, which are breakout/breakdown levels. Speaking to "The Wall" and the recent Chinese trade talks, our DC-based Washington Policy analyst, Ed Mills, writes:

Putting the shutdown in the national spotlight did nothing to spark a deal between President Trump and Democratic lawmakers for border wall construction, and it appears that we are in the midst of the longest government shutdown in U.S. history, with the chances of a national emergency declaration significantly increasing. U.S.-China trade talks concluded in Beijing this week on a positive note and heightened optimism among administration officials that a deal can get done by the March 1 deadline. The next high-level talks will be key, and must sway the administration's skeptical China hawks.

This morning the preopening S&P 500 futures are off a large 26 points as China's exports shrink the most in two years and Britain's Brexit worries leap.

View as PDF


Additional information is available on request. This document may not be reprinted without permission.

Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years.

RJ&A or its officers, employees, or affiliates may 1) currently own shares, options, rights or warrants and/or 2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report’s conclusions.

The opinions offered by Mr. Saut should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your Raymond James Financial Advisor.

All expressions of opinion reflect the judgment of the Equity Research Department of Raymond James & Associates at this time and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Other Raymond James departments may have information that is not available to the Equity Research Department about companies mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this presentation’s conclusions. We may perform investment banking or other services for, or solicit investment banking business from, any company mentioned. Investments mentioned are subject to availability and market conditions. All yields represent past performance and may not be indicative of future results. Raymond James & Associates, Raymond James Financial Services and Raymond James Ltd. are wholly-owned subsidiaries of Raymond James Financial.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. The prospectus contains this and other information about mutual funds. The prospectus is available from your financial advisor and should be read carefully before investing.

Privacy Policy

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. and Law & Associates, Inc. Law & Associates, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Raymond James financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact your local Raymond James office for information and availability.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.