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Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (January 12th):

...[T]he tone seemed to change last Wednesday when ADP Employer Services reported that 693,000 private sector jobs were lost in December. They also revised November’s job loss number upward to 476,000 from a loss of 250,000 jobs. Since we pay more attention to the direction of revisions than we do to the actual headline numbers, this revision was disturbing.

Also disturbing that morning was Intel’s (NASDAQ:INTC) shocking news of a 23% decline in 4Q08 revenues due to weak “end demand.” Both revelations cast a pall over “the Street of dreams,” and when banking analyst Meredith Whitney stated that the nation’s banking complex would need another $40 billion the rout was on, leaving the DJIA (8599.18) lower by 245 points. The Wednesday Wilt broke the senior index below a rising trendline that had been forming since late December, causing one Wall Street wag to exclaim, “Uh oh!”

Clearly, last week’s action was worrisome, yet it is not without precedence. Indeed, following a 20%+ rally, like we have had since the late November “lows,” the markets tend to peak and pull back for three to five sessions. Then they tend to re-rally to a higher high before becoming more vulnerable. Interestingly, the equity markets peaked last Tuesday (1/6/09) and have now pulled back for the prerequisite three sessions. If past is prelude, the pullback should subside Monday or Tuesday and the re-rally should begin. If not, trading positions will be stopped-out (read: sold) and investments should be hedged for the downside.

While the causa proxima for last week’s decline was the aforementioned ADP report and Intel’s revelation, there could be another reason why the equity markets peaked on Tuesday. Indeed last Tuesday, almost unreported until Friday’s Wall Street Journal (page A11), was a dramatic changing of Congressional rules whereby: 1) gone are term limits for committee chairman (read: purely seniority over merit); 2) Gone are cost containment measures on Medicare; 3) Tax increases will now be easier to pass; 4) Tax cuts will be more difficult; etc. As stated in the article titled “Pelosi Turns Back the Clock on House Reform:”

“Ironically, some of the biggest losers from the Pelosi rules changes will be fiscally conservative Blue Dog Democrats. The ‘pay-go’ rules they fought so hard for two years ago – to require new spending proposals be balanced with additional revenue or cuts elsewhere – have been gutted. And no term limits will mean they will have to stand in line for a taste of real power. ‘All of those nice pro-life, gun-owning young Democrats recruited by Rahm Emanuel will never have any real influence now,’ says Grover Norquist.”

The call for this week: If the script continues to play the pullback should end Monday or Tuesday with the equity markets re-rallying to a higher high before becoming more vulnerable to the downside. The “tell” for if this pattern is going to play should be the financials; they need to stop going down!

Nevertheless, while we have been constructive on stocks since October 10th, thinking the upside should be favored into mid-January, it is now indeed mid-January; and even if we get our prescribed “look” above 1000 on the S&P 500, it is pretty late in the game. If I had one group to focus on from here it would be the energy complex, preferably energy stocks and ETFs with a yield, since I continue to believe energy made its capitulation low back in December.

Disclosure: None