Strategist Jeff Saut on Performance Anxiety ~ market folly

Monday, September 10, 2012

Strategist Jeff Saut on Performance Anxiety

As the market continues to rally and hit new 52-week highs, strategist Jeff Saut is out with his latest commentary prudently entitled, "Performance Anxiety."  Saut has recently advocated that stocks would hit the 1450-1477 zone on the S&P 500.  Under such a scenario, he questioned how under-invested portfolio managers would feel.

We've highlighted how many hedge funds have had low net equity exposure as of late, mainly due to various macro uncertainties (including the European crisis and potential China slowdown). 

Hedge funds typically underperform during big rallies due to their hedged nature.  But at what point does it start to become too costly and at what point do managers begin to worry?

Saut writes, "The concurrent performance anxiety would be legend because not only would you have performance risk, but also bonus risk and ultimately job risk."  In an era where so many are judged on short-term performance, it's certainly worth monitoring.  We tweeted back on July 27th that the max pain trade for hedge funds could be a move higher due to low net exposures.

But while many may be feeling pain near-term, Saut sees a correction ahead. 

He writes, "I have been treating the June 4th 'low' as THE 'low' on a daily/intermediate-term basis.  That said, the election year cycle suggests a 'high' is due this month with a pullback into mid/late-October that sinks the footings for the year-end rally.  The catalyst for a decline should surface this week out of either the Fed meeting or the German constitutional court meeting.  In any event, a near-term trading top is due."

So while Saut says a pullback is due, he hints that those experiencing performance anxiety should brace for a year-end rally as well.

Embedded below is Jeff Saut's latest market commentary:

You can download a .pdf here.

For more from the strategist, head to his thoughts on the third recession head fake in a row as well as his rules for position sizing.

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