Jeff Saut: The Economy's Rolling Over, And It's Time To Get Cautious On Stocks

On his latest missive, Raymond James strategist Jeffrey Saut reveals some real nervousness about the state of the economy and the market:

As often stated, since the Dow Theory “sell signal” of September 1999 I have suggested the equity markets were likely going to be in a trading range pattern similar to the 1966 – 1982 affair. Clearly, that is what has occurred over the last 10 years. Most recently, the 54% slide from The Dow’s October 2007 peak into its March 2009 low has been followed by a 70%+ rally that ended in April of this  year. Subsequently, the senior index experienced it first double-digit decline since the March 2009 bottom, ushering in cries of “the bear market rally is over!” To me, however, all that’s transpired is another decline within the context of the broad trading range the Dow has been in since the turn of the century. Nevertheless, I must admit I am concerned because a Dow Theory “sell signal” was  registered during the recent decline. Accordingly, I am back in a cautious mode, which is why investment accounts should have some cash, while trading accounts should be relatively “flat.”  I also have to admit I am worried about the weakening economic reports.

To be sure, the number of economic indicators surprising to the downside is about equal to those surprising on the upside. According to the astute Bespoke Investment Group, “Of the  eleven economic indicators released last week, only six came in ahead of expectations, while five surprised to the downside.” One of those downside surprises was Wednesday’s shockingly weak New Home Sales, which inked the weakest reading since the statistics began in 1963. That said, I don’t think housing is going to spin the economy into another recession, because going from 1.5  million housing starts to 400,000 is plainly impactful. But, going from 400,000 to 300,000, well who cares? To me participants should be much more nervous about the sharp decline in the Economic Cycle Research Institute’s (ECRI) weekly leading economic index (see the attendant chart). Readers of these missives should recall I often referenced this index as proof of the economic recovery when the index was ramping at its sharpest rate in history. Regrettably, it is now declining at one of its sharpest rates (see chart).

But it's not time to freak out just yet:

While I am indeed concerned about the ECRI’s weekly index of leading indicators, it should be noted that while the ECRI Index has been an excellent predictor of the economy, it has NOT been very accurate in predicting the stock market’s direction. Still, given the Dow Theory “sell signal,” the intermediate “sell signal” registered by my proprietary trading indicator, and the “hook down” in the  monthly stochastic indicator (all of which can be seen in last week’s letter), I have no choice but to be cautious until circumstances change.

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