Gurus Clash Over Last Week's Drubbing

The smart guys on Wall Street are bickering.

Monday's solid advance, coming off several days of market tumbles, was accompanied by a heated debate about what it all means among the market pundits, a.k.a., "the gurus."

The major averages started the week on a positive note amid evidence M&A activity isn't dead yet, as was widely rumored last week.

Along with month-end considerations and exhausted sellers, deals involving Ingersoll-Rand, Verizon-Rural Cellular and (possibly) Virgin Media helped stabilize the market.

"The cheerleaders came out trying to talk this back up," Jeffrey Saut, Raymond James' chief strategist, says on Monday's The Real Story podcast. "They figure it's like the pullbacks we've seen in the past 12 to 18 months. I'm more skeptical [because] I think you've done more technical damage than in the past."

Indeed, bulls say the recent trend of short, sharp corrections of 5% to 7%, quickly followed by rebounds and new records for major averages, will repeat itself. Optimists further argue stocks still trade at attractive valuations -- relative to Treasuries and on a forward P/E basis. The S&P 500 is trading at 15.1 times forecasted earnings, its cheapest level since January 1991, according to Bloomberg.

But the S&P 500 violated its June "reaction low" of 1490 last week, and that support "now becomes overhead resistance," Saut says. "If this turns out to be a more severe correction than the past four years, the 200-day moving average [around 1449] will be broken."

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