In today’s podcast, Jeffrey Saut, the Chief Investment Strategist at Raymond James, tells Financial Sense Newshour that investors would do well to heed the message of the market, particularly by following Dow Theory buy and sell signals, which, he says, have been “pretty darn accurate” at identifying the major trend.
Here’s a chart showing the periods in which Saut identified major Dow Theory buy and sell signals in the past with the flash crash noted as a dotted line (per his explanation further below):
Here are a few excerpts from today's interview that aired to subscribers (click here for audio):
“Nobody can time the market consistently but if you listen to the message of the market, you sure can tell if you want to be playing hard or not. I've talked to you about this before—there was a Dow Theory sell signal in September of ‘99. It wasn't Jeff Saut making the call, but it was Dow Theory saying the best has been seen and discounted—you ought to raise cash, you ought to reduce these high betas stocks like tech and telecom, but, most importantly, you ought to manage the risk and not let anything go very far against you. There was a Dow Theory buy signal in June of 2003. There was a Dow Theory sell signal in Nov 21st of 2007. And there was a buy signal in the early summer of 2009. And all you had to do in concert was take those various signals and invest accordingly and manage the risk and you've done just fine.”
There are some that criticize Dow Theory and say that it's not relevant anymore, but, as you point out, it's worked pretty well.
“Yeah. There's different ways of interpreting Dow Theory. I was taught by my father and I also studied some of the great Dow theorists as has Richard Russell. And there's only been one false signal in the past 15 years in the way I was taught...and that was in May of 2010 when you had the Flash Crash. And then you got a false Dow Theory sell signal that was actually quickly reversed the next month. But that is the only false signal I have seen in the past 15 years, so I continue to think Dow Theory tells you the primary direction of the equity markets and it's pretty darn accurate.”
Let's talk about what it's telling us now. We've seen some new highs with the Dow Industrials and we've seen some new highs with the Transports. As I look at the charts, it's telling me that this bull market is still in place.
“You actually had back to back Dow Theory buy signals last week on Wednesday and Thursday when both the Dow Industrials made new all-time highs and the Dow Transports made new all-time highs...now you did use a lot of internal energy up making those new all-time highs and you've also got some divergences here. You have price divergences where you've got the mid-caps making new highs while the small-caps are a long way from doing that. The operating company only advance-decline line, which takes away the bond funds, ETFs, and interest sensitive things—that has not confirmed the high....the ratio adjusted McClellan Oscillator and only 8 times in the past 90 years has it done what it did on Tuesday and Wednesday of last week. And every time that's happened in the past 90 years, it's been a cause for a pause. So, on a short- to intermediate-term basis I think you need to be still little cautious here but I think you need to view any pullback here—whether we finally get a 10-12% pullback, which is what the historic odds call for some time this year—I think you need to view that in the construct of a secular bull market.”
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