Broker Talk: How to Prepare for a Bounce
Who's Talking: Jeffrey Saut, chief investment strategist and managing director of equity research at Raymond James & Associates.
The Gist: With the markets trading at levels not seen in more than a decade, extreme bearishness is the order of the day. And no wonder: A seemingly endless procession of lousy corporate and global economic data has only confirmed the market's worst assumptions about the length and breadth of the recession, making hopes for a second-half recovery more remote every day. But that doesn't mean there are no opportunities for investors in equities these days, or so the thinking goes at Raymond James (RJF: 12.33, -1.38, -10.06%).
For anyone looking to call the long-awaited bottom in U.S. equities, Jeffery Saut, chief investment strategist and managing director of equity research at Raymond James, has found an interesting contrarian indicator: The strategist was met with a telling wave of invective for trying to stay somewhat constructive on stocks. "Ladies and gentlemen, in my 38 years at this perch, such a string of 'hate mail' has typically been associated with downside inflection points," Saut told brokerage clients. (Read the full report on Raymond James's site here.)
Saut is by no means a bull, but he does want investors to be prepared for the next bear-market bounce. The strategist is advising that clients stay keen for a "pornographic plunge" type of trading hour similar to the ones that became all too common last fall. Saut's thinking is that if the market experiences that “I-think-I-am-going-to-be-sick” type of hour, it might be sufficient to lock in a tradable low.
No one knows where the market will bottom, of course, and it looks to be range-bound at best for some time. As we've noted recently, this environment does indeed require investors to take a more active approach. It's also imperative that they stick to a disciplined system like the one suggested by SmartMoney's own James B. Stewart, who has long advocated a strategy of buying into declines and selling into rallies.
Raymond James's thinking isn't groundbreaking; nor does it come without risk. But it's a strategy that's working for Keith McCullough, chief executive and chief investment officer at Research Edge, a New Haven, Conn., investment research outfit, whose asset allocation portfolio is essentially flat in 2009, compared with a 20% decline for the broad market.
"The S&P 500 was down another 0.64% [Tuesday] so I added to my exposure to U.S. equities, taking my asset allocation model up to 22% in the U.S. versus the 9% I had allocated in the U.S. as of Monday morning,” McCullough wrote in an email. "Immediate-term bottoms are processes, not points...so when prices are lower than my entry point, I buy more."
The good news is that sort of daily jumping in and jumping out of the market can allow you to eke out gains. And it will help you avoid missing those rare big-rally days that will be so critical to your portfolio's eventual recovery.
The bad news? The more you trade, the more commission and fees you'll cough up to your broker.
Smart Money
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