Interview with Jeffrey Saut, Chief Investment Strategist at Raymond James. Log in and visit our Newshour page here or iTunes feed here for audio.
Financial Sense: What's Dow Theory telling you about the market currently?
Jeff Saut: [O]n August 25th the Dow Industrials and the Dow Transportation Index simultaneously made closing lows below the mid-October lows of last year and that is a Dow Theory sell signal. Now, initially, I have chosen to temporarily ignore that because in the past 18 years there has been only one false Dow Theory sell signal and that happened to be when the Dow was down 1000 points on May 6th of 2010 during the Flash Crash. That proved to be a false Dow Theory sell signal and it was corrected about 4 weeks later with another buy signal by Dow Theory. This one is not going to be corrected that quickly because you will need new all-time highs in both the Industrials and the Transports to reverse this signal, but I am still hopeful that it will prove eventually to be a false signal. But if we close below the August 25th closing lows I am going to get even more defensive than I already am.
Financial Sense: How defensive are you currently? When we spoke to you in June you said you had about a 20% cash position. Are you raising more cash?
Jeff Saut: I have not. I am still at about 20% cash. Again, if we close below those lows I will be taking more defensive measures and weeding out weak stocks in the portfolio and hedging those stocks that I don't want to sell, like Raymond James stock.
Financial Sense: Do you have a best- and worst-case scenario for how the market may perform from current levels?
Jeff Saut: There's no way of telling if we have tipped over into a tactical or cyclical bear market--there's no way of measuring the downside just like there's no way of measuring the upside...let's take a worst-case: let's say the S&P only earns $110 next year in 2016. And let's put a median multiple on that of 15.5. So that gives you roughly a 1700 price objective, which is down around 11 or 12% from where we are right now. But...the markets could just as easily rally 12-15% from here.
Financial Sense: If that worst-case scenario were to unfold, which does align with remarks made by Louise Yamada on our show (see here), that would put us into a technical bear market at 20% or more from the highs. If that were to happen, would that change your view in terms of whether or not we are in a cyclical vs. secular bull market?
Jeff Saut: At this point I wouldn't think so. Secular bull markets tend to last 14 or 15 years and they tend to compound at about 16% per year so what you could be is still in a secular bull market but we could be involved in right now is a tactical or cyclical bear market within that secular bull market.
Financial Sense: We are seeing a breakdown in biotech, which has been one of the strongest performing sectors of the market, with Hillary Clinton's recent comments on regulating drug pricing being cited as the catalyst for this recent selloff. Does this concern you?
Jeff Saut: We actually wrote about that a month or so ago saying that the biotech index...was exhibiting all the characteristics of making a top here. The valuations in a number of the biotechs...had indeed taken on bubble proportions. I think what Hillary said is just pure prattle to an uninformed electorate. Even if a Democrat is president in 2016, Congress almost certainly would not approve of drug pricing regulation and the House is almost certain to remain Republican…
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