New market thoughts from Raymond James’ Jeff Saut: “A McClellan Moment” 05/12/17

“FYI Jeff – Apparently Tom McClellan has been reading your ‘Morning Tack’.” . . . An email from a portfolio manager yesterday morning
Tom McClellan, the astute author of The McClellan Report, has developed some terrific proprietary indictors of his own, so I doubt the ex-Vietnam helicopter pilot is seriously reading my reports. However, the tagline the portfolio manager sent me from Tom’s report read:
“Stocks: Bullish for short, intermediate, and long term trading styles. A bottom is due this week, according to our Timing Model signals, probably one to go up out of rather than down into. I’d add to bullish positions on Thursday.”
Evidently, Tom’s and my models agree with each other with the exception that my models are looking for a bottom next week. Those same models suggested this week, and next, would have a “timed trading” vent, but yesterday’s early morning action was anything but timed. Indeed, the S&P 500 (SPX/2394.44) stormed out of the gate with a quick ~18 point loss that was arrested just above the lower end of the recent trading range of 2380 – 2400; and, we have to give credit to Tom McClellan because if you bought that “morning melt” you bought the lows of the session. Regrettably, we did not do that since we were driving from Muskegon to Traverse City to speak at an event. Still, for the past four weeks Andrew and I have repeatedly stated that our models flipped bullish on April 19, 2017 and advised participants to tilt portfolios accordingly.
Speaking to yesterday’s “Passive vs. Active” report, we received a ton of emails chastising us for what we wrote. The typical email read:
“In this morning’s Morning Tack you reference the fact that the S&P 500 is just 9% of the U.S. traded stocks and therefore with a growing number of investors favoring passive management (via the change in flows) that, “This means we are pumping most of our money into just a handful of all of the available stocks and ignoring the rest.” However in 2016 the small cap index was up 26% and the S&P 500 was up 12%. Furthermore of course most of the money is going into the S&P 500 as its share of total U.S. market cap is about 80% of total U.S market value. That said, lots of money is also going into U.S. mid & small cap indexes. Finally as the SPIVA results reveal the vast majority of actively managed large, mid & small cap funds underperform their index counterparts (and this is before consideration of taxes).”
To that we responded, those comments were not mine, but from an excellent thinker named Paul Siluch, a Raymond James Ltd. a portfolio manager. Secondly, active managers have been outperforming passive since last August. And thirdly, we reprint this quip from one of the smartest portfolio managers around, namely Seth Klarman (Baupost Group). To wit, “One of the perverse effects of increased indexing and ETF activity is that it tends to ‘lock in’ today’s relative valuations between securities. Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.”
This morning the preopening futures are again lower, which is in keeping with our models that are looking for a bottom next week as the sun rises over Traverse Bay here in Michigan.

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