Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Caution is the word warranted here. Last week’s market movements suggest I could see a deep downside correction, or at best sideways market action for the remainder of the summer -- very similar to what the markets experienced in the summer of 2003.

I’m flat on a trading basis and 80% invested in the investment account. Still, even though history suggests I should get a decent correction following the 40% straight-up rally, I continue to think it’s a mistake to become too bearish right here.

Sticking with the 2003 stock market pattern, after bottoming in March 2003 at around 800, the S&P 500 (SPX) sprinted into its June high of roughly 1000. From there, it flopped and chopped into late August, but never gave back more than 6% (although certain stocks gave back considerably more). Then, in September 2003, the SPX broke out above those June highs and leapt another 150 points into January of 2004. While history doesn’t necessarily repeat itself, it does sometimes rhyme.

I think it might just rhyme this summer: The equity markets could trade sideways as investors decide whether or not to believe the improving economic numbers. My guess: This won’t be figured out by the markets until late summer. It’s admittedly difficult to envision a V-shaped recovery, even though the history of recessions is that the sharper the downturn the more vigorous the upturn. In the current instance, following the recent rally, stocks are now priced such that they need a solid economic expansion to extend their gains. The problem is that economic expansions are driven by rebounds in housing and autos, which causes companies to increase capital expenditures and actually hire some folks. Such outlays are pretty dependent on debt financing. Unfortunately, given the country’s debt deleveraging mindset, it is difficult to embrace the thought of a sharp economic recovery.

That said, I still believe the economic numbers are going to look better than most people think into year’s end. That view is spurred by various governmental programs/incentives, as well as the huge amount of money being thrown at our problems. As UniCredit’s strategist stated in Friday’s Financial Times, the equity-market reality check I’d anticipated is now underway. However, I think an abrupt and lasting deterioration in equity markets in 2009 is improbable. Instead, 12-month forward earnings estimates should stabilize or recover in the second half due to improvement in economic indicators.

So the question now: Was last week’s wilt the start of the anticipated correction? Interestingly, while the cap-weighted S&P 500 was only down 2.6% for the week, the equal-weighted S&P 500 was down 4.1%. The implication is that the decline was broader than the much-watched indices suggest. In fact, of all the things I monitor, only aluminum and natural gas rose on the week, by 0.06% and 11.51%, respectively.