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‘Excessive optimism’ to fuel stocks higher, for now: Saut

Jeff Macke
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You don’t need a weatherman to know the wind is blowing cold so far in 2014. The S&P500 (^GSPC) is off to its first 3-day losing streak since the ‘70s, and the Nikkei 225 (^N225) is getting poleaxed. In other news the nation is seeing the coldest temperatures in 20 years as the results of polar vortex (read: Cold Front). In the attached clip Raymond James super strategist Jeff Saut says traders feeling the itch to sell stocks will get a better chance later this month when a burst of “excessive optimism” sends stocks to one last record high before a dip.

Breakout viewer might recall Saut’s prescient call for a pullback last July know better than to take his advice lightly. This time around Saut sees a trading low will be made sometime later this week, followed by a rally into later this month.

There are a number of ways to play these wiggles depending on your timeframe and current positioning. Short-term traders can add here and try to ride a wave of optimism into the end of the month, bears can can short rallies in anticipation of a 5-10% pullback and freezing cold investors with a preference for doing less trading and more investing can opt to do absolutely nothing. Saut says the correction we get will eventually be resolved with higher stock prices.

Even a potential drawdown of as much as 10 - 12% drawdown over the next 12 months will be within the context of a secular bull market. As traders over the last year have learned, the potential for a bear pullback is easily hammered by a big trend higher. 

With the cold outside and ice in the markets it might be a nice time for bulls and bears alike to pull the covers over their heads and set themselves down a long winter’s nap.

Disclaimer: Merrill Lynch is not responsible for the editorial content of this program.

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