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Time to sell losers and get ready for correction

Stocks opened with a rather half-hearted rally on Monday after last week’s thrill ride. For long-term investors the moves may not mean much of anything. After all, in the context of global economic growth and a stock market rally of more than 200% over the last five years and more than a 100 years of greater than 7% annualized growth, a few percent here or there shouldn’t throw you into a tizzy.

For those who look to optimize their gains however, Jeff Saut of Raymond James says days like this are a nice opportunity to clean up your portfolio and get some cash on hand for better opportunities. In the attached clip Saut says history favors a correction of 10 - 12% in the next few months. While others are making similar calls Saut’s is based on the same set of signals that correctly forecast the more than 5% drop of January and early February, giving it a touch more weight.

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Of the larger drop Saut says it may already be underway after last week but his projection is based on the market action over the last month, not just the sell-off last week. From a buy signal in early April Saut set his price target of 1950 to 1975 for the S&P 500 (^GSPC). “We traveled up into that target zone into the first week of July and I have been telling people since then to sell stocks out of their portfolios that have not performed over the last two years and raise some cash.”

Again, we’re talking about portfolio tweaking, not panic. If you sell your winners you end up with nothing but losers in your portfolio. In a big-picture bullish tape the higher-beta winning stocks get hit hard. That’s why you want to buy those dips with cash generated from sales of laggards.

Related: Time to place long-term bets on rising short-term rates: Hoenig

In the big picture Saut says stocks are going to be pushed higher even if it gets sticky over the next few weeks. That’s because as uninspiring as the economic data may be things are directionally getting better. That’s good enough for stocks, as Saut sees it.

“I think earnings are going to continue to come in better than expected as they have in the most recent quarter and I think people continue to be woefully under-invested.”

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