2 Top Sectors As Stocks Hit New Highs

March 31, 2016

Jeffrey Saut is the chief investment strategist for Raymond James & Associates. He is well-known for his insightful commentary regarding the stock market, and makes regular appearances on the major financial news networks. ETF.com recently caught up with Saut to get his take on the latest rally in the markets.

ETF.com: Back in February, when the stock market was at its lows near 1,810, you called the bottom and said the market would rally back sharply. Since then, the S&P 500 surged to more than 2,050. What's your view on the market now?

Jeffrey Saut: The market is overstretched on a short-term basis. You have over 90% of the S&P 500 stocks above the 50-day moving average; that's about as overbought as it gets.

There will probably be some attempts to pull back here a little bit, but I think the lows were put in on Aug. 24 last summer. You had a pretty spirited rally off that, and then you came back down in January and February of this year.

On Feb. 11, you made what a technical analyst would call an undercut low, meaning you went slightly below that Aug. 24 low of 1,812. The February low was at 1,810.

We said at the time that it was a double bottom and the lows were in. That was the time to recommit that capital, and we recommended a number of stocks down at those lows.

There might be attempts to pull back now, but I don't think they get very far before we get another leg to the upside.

ETF.com: Do you think ultimately that 2,135 all-time high for the S&P 500 will be taken out?

Saut: I do. I think it'll be taken out this year.

ETF.com: Why have we had these two large corrections in a row—one in August and one in January? Is that unusual, or is this just normal correction in a bull market?

Saut: It's normal correction in a bull market. We had a little accident in Oct. 19, 1987 that took 22% or so out of the Dow Jones industrial average. It felt like a big deal at the time, but if you go back and look at it on a long-term chart, it was one heck of a buying opportunity.

Bull markets tend to climb the proverbial wall of worry, and you have corrections from time to time. Long-term market observers know that when you get a straight-up market rally, it usually doesn't last very long.

When you get these 10% to 15%—and even in some cases, 20%—pullbacks, it's actually a very good thing.

Long-term observers of markets know that more corrections and the more often the secular bull market is held back, the bigger that bull market is going to be and, ultimately, the higher the bull market is fated to climb.

I've seen this act before. I think we're in a secular bull market and we've been in one since March 6, 2009.

ETF.com: Of course, the reasons for the recent corrections that people talk about are oil and China. Are those still things to pay attention to?

Saut: The correlation between crude oil and stocks has only been in existence for about six months. If you go out further, in the past 10 years, there is zero correlation between the direction of crude oil and equities. Certainly, there is a high correlation between the direction of crude oil and oil stocks, but not the overall market.

ETF.com: What's your take on corporate earnings going down four quarters in a row? Is that simply due to the energy sector profits being decimated?

Saut: To a large degree, it has to do with the energy space.

But if you believe S&P's bottom-up operating earnings number for this year, as of last Monday, they were somewhere around $121 for the S&P 500. For next year, they're at $137.

If those numbers are anywhere close to the mark, it means you're going to get a pickup in earnings in the back half of this year. The comparisons you're going to be up against are going to be pretty easy, so the earnings momentum going forward ought to look pretty good.

ETF.com: You mentioned we're still in a secular bull market that's about seven years old and counting. How much longer can it run?
Saut: If you go back and look at the history of secular bull markets since 1900, they tend to last 14 or 15 years, and they tend to compound at about 16% per year.

You have the 1949-1966 secular bull market that peaked in '66. And then the equity markets virtually went sideways for 17 years, until we broke out in 1982.

Then began the 1982 to 2000 secular bull market, which lasted 18 years. And as I said, of course, there were pullbacks in that ascent.

Ultimately, that bull market peaked in 2000, and then we went sideways again for 13 years, until you broke out in 2013 to the upside.

ETF.com: Are there any particular sectors or areas of the market you prefer over the others?
Saut:
I like technology and health care. Tech is trading at a price to estimated growth ratio of about 1.3 or 1.4. Utilities are trading at a price/earnings to growth ratio of 3.4. If you think utilities are going to grow faster than tech, I've got a few yards of swampland down here in Florida I'd like to sell you.

[Editor's note: Related ETFs include the iShares U.S. Technology ETF (IYW | A-99) and the Health Care Select SPDR (XLV | A-93).]

Contact Sumit Roy at sroy@etf.com.

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