Montreal, Canada

Sell 'em when you can, and not when you have to. This morning's strong opening is the first positive session in more than a week and I plan on reducing my equity exposure – already near record lows in terms of overall asset allocation.

Over the past few weeks, a blizzard of economic data in the United States strongly implies a softening economy over the second half of the year. Virtually every indicator since May has shown a marked deterioration, including employment, housing, consumption, consumer confidence, auto sales and the highest office vacancy rates in 17 years – suggesting employers don't plan on a hiring binge any time soon.

Worse, credit indicators have also deteriorated since May. Credit spreads across the board have blown wide open, especially the difference between short-term and long-term interest rates. The rapid compression of the Treasury yield-curve is flashing a warning sign to investors just as it did in late 2007; the difference between ten-year and two-year rates has crashed from 282 basis points on March 31 to 235 basis points this morning. That's a big drop.

But it's not just the United States that's showing signs of a slowdown. I think we're only at the beginning stages of a multi-year collapse in Chinese real estate values – clearly at absurd levels and, for the most part, completely out of reach for the average Chinese buyer. Chinese manufacturing has also slowed since April coupled with a marked decline in the country's trade surplus. The Shanghai Composite Index is down more than 23% this year.

If the assumption is correct that corporate earnings are too optimistic over the next six months then stocks are still overvalued. The S&P 500 Index yields a lowly 2.1% -- hardly a bargain. And if that's true then investors should use any intermittent rallies as an opportunity to get out of Dodge and sell stocks.

To be sure, many large-cap stocks do trade at attractive multiples this summer. I discussed this at length yesterday. Dividends for some of the largest S&P 500 companies are anywhere from 50% to 100% higher than the yield available on the broader market. Still, cherry-picking at these levels probably isn't a bad idea but the investor must make purchases with the intention of doubling-down over the next several months as stock prices head lower.

We're living in extremely dangerous economic times. The bulls might use this pessimistic view as fodder to build the case for a resumption of the post-March 2009 cyclical rally; I certainly do not. The bond market is much smarter than the stock market and it's telling investors that big trouble lies ahead, probably in 2011.

Since I'm a horrible market-timer and a big bear anyway, I'm using any rallies to sell stocks and, instead, raising cash reserves. Stocks are barely 10% of my portfolios.

For my U.S. accounts, I'll be adding to Treasury bonds on any correction – probably in conjunction with a rally in stock prices. I'm especially drawn to long-term T-bonds and strip or zero-coupon bonds, which should rally sharply as we surpass the December 2008 yield levels. It's deflation first, inflation later. This makes high quality bonds still attractive.

My European accounts, however, are heavily invested in some of the best risk-adjusted CTAs in the world – mostly based in London, Rotterdam and Zurich. CTAs, or diversified managed futures funds, have been mired in a draw-down since last year and should be aggressively purchased at these low levels since they have always shown a negative correlation to stocks amid severe market breaks. In 2008, CTAs gained an average 16%.

At some point over the next 24-36 months, I suppose, stocks will be the greatest value-based investment in a generation. That's when I plan on selling bonds, managed futures (CTAs) and unloading some of my gold. From now until then, however, this is a time to be very cautious ahead of great danger.

I'm en route to the Freedom Fest in Las Vegas tomorrow morning for The Sovereign Society. I'll be back on Thursday. Dugald will provide his insights on the technical picture for stocks on Friday.