Jeff Saut: Market Trends Suggest 13% Bounce Higher

Wednesday, 24 Aug 2011 | 6:33 PM ET

You could almost hear the bulls breathe a collective sigh of relief on Wednesday after the S&P closed with strong gains and the Dow advanced by triple digits.

Considering negative sentiment has prevailed in the market since early August, bulls are hoping the recent 3-day winning streak signals a change in tone.

"Some investors have been buying because it looks like perhaps we've seen the lows of the correction," explains Hugh Johnson, chief investment officer of Hugh Johnson Advisors in a Reuters interview.

Is the Bottom in?
Jeff Saut, Raymond James, says the bottoming process now is similar to what traders saw in the fall of 1978.

Jeff Saut chief investment strategist at Raymond James thinks buying is the right move to make.

He tells CNBC if history is any indication, the next big move should be higher.

Saut believes the current market malaise is similar to a pattern that emerged over 30 years ago. “I’m using the Oct ‘78 and Oct ‘79 declines as a pattern,” he explains, “they came out of nowhere” just like the current declines and the trends are remarkably similar.

At the time markets made a selling climax and sharp throw back rally, like we’ve just seen and we tested the lows.

That sounds a little complicated, but the take away is simple. "The Oct ’78 bottoming affair took 6-7 weeks and the Oct ’79 took 4-5 weeks. “Both of those sequences were followed by 13% rallies,” he says.

In other words, if we’re not going into a recession Saut thinks that’s how the market plays now.

Of course, that’s begs the question ‘how should you position?’

Saut says play energy. “I think with demand going up in emerging and frontier markets, energy stocks with yields make a lot of sense.”

And Saut gives us names. “Play it long Energy Partners,” he says. “The stock looks like it bottomed a few weeks ago and it has a decent dividend yield. And another name Saut suggests is Lin Energy .

Also he suggests playing the rails. "Norfolk Southern and KSU, are his picks in that space.

“All these stocks are very attractive,” he says. "People are just too bearish."

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