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Ho Ho Ho! Rough Waters in the Near–Term Could Set Up a "Santa Claus Rally"


After raising the red flag last summer that a near-term top in the stock market was forming, Raymond James investment strategist Jeff Saut is back in his bell tower and sounding the alarm. It may not be a panic, but it is a clear signal that a five to seven percent pullback could hit within the next two weeks.

In a note to clients this morning, Saut writes that his market timing models "continue to counsel for caution in the short-term." If he's right, as he explains in the attached video, it could be just the thing investors need to finish an otherwise awesome 2013 on a high note.

"I think (a 5-7% correction) sets up the fabled Santa Claus Rally," Saut says, adding that he thinks the ensuing rally will likely carry on past Christmas.

"I think we're going to do pretty well in the new year," he predicts, noting the seasonal statistics that have made December a very hard time of year to be short stocks.

In the meantime, Saut is looking out for 3 key levels of support for the S&P 500 (^GSPC): 1784, then 1775, and finally 1760.

But regardless of what Saut's short-term models tell him, his bigger thesis continues to favor equities.

"Longer term, I think we're in a new secular bull market that has years left to run," he says.

The irony, he points out, is that "very few people believe (we are in a bull market) because they think you need to have a feel-good environment" to do so. As a reminder, Saut is quick to point out that "when you do get that feel good environment, it's usually late in the game."

And finally, another area of support that could serve as a tailwind for stocks is Saut's prediction that presumed Bernanke-successor Janet Yellen will tweak the Federal Reserve's economic targeting efforts to include GDP, rather than just 6.5% unemployment and inflation.

"I don't think (Yellen) is going to do any tapering until you get GDP approaching 3%," he says, which he thinks won't be happening at least for the next few months.