Jeffrey Saut: Be conservative, but not conventional

The following is an excerpt from the commentary of Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates, for Monday, April 16. To read the full commentary, click here.

Since the SPX’s April 2nd peak the two worst performing sectors have been Energy and Financials, which have fallen more than 5%. While this is not surprising for Energy, because that group did not act well during the entire 1Q12 rally, Financials was one of the best performing sectors of the quarter, suggesting their weakness since early April may be telegraphing a change in the investment environment.

Also concerning was last week’s 17% leap in the Financials’ Credit Default Risk Index. Then there was market-leading Apple’s (AAPL/$605.23) weakness over the past four sessions, a four-day downside skein not seen since last year. With such “tells,” and given the fact that the INDU and SPX have fallen below not only their envisioned support zones, but their respective 50-DMAs, we continue to counsel for caution, believing early this week should provide better clarity on the near term directionality of stock prices. Verily, “Be Conservative Not Conventional!”

The call for this week: Earnings season commenced last week with 75% of the reporting companies beating estimates. This week will show increased earnings reports with many of the major companies reporting. Our sense is the earnings environment will continue to be pretty good, which should limit the stock market’s downside to the 1320 – 1340 level.

Moreover, the SPX held above its weekly uptrend chart line at 1358 last week, leaving the technical setup not as vulnerable as it was in May 2011. However, the December to late January upside runaway appears to be over until the stock market’s weekly internal energy is rebuilt.

Unfortunately, the weekly internal energy indicator is nowhere near being fully recharged. The implication is that the downside should be contained, but the SPX is also not likely to break out above 1425 without spending some more time consolidating.