NEW YORK (TheStreet) -- Changes in capacity utilization won't signal when the stock market has topped out, but it is a very accurate gauge of overall economic health. And right now, it's a pretty sickly looking indicator, according to Tony Sagami, editor of Rational Bear.
"Capacity utilization has been dropping like a rock in 2015 and hit 78% in July for the industrial companies," said Sagami, adding that a reading below 80% is "terrible," and that U.S. factory output is now lower than it was prior to the financial crisis.
Those seeking to profit from what Sagami foresees as a prolonged downturn in U.S. manufacturing activity should purchase the ProShares UltraShort Industrials ETF (SIJ - Get Report) , which is up almost 10% so far in 2015. The ETF seeks daily investment results (before fees and expenses) that correspond to two times the inverse of the daily performance of the Dow Jones U.S. Industrials Index.
To further his bearish case, Sagami points to the fact that business inventories increased at the fastest back-to-back quarterly rate on record. Inventories rose 0.8% in the second quarter, following a 0.3% increase in the first quarter, and now sit at $586 billion. In his view, the year-over-year increase in inventory is due to a lack of sales rather than a positive restocking of the shelves.
Another bearish maneuver suggested by Sagami is to short, or buy put options on, the iShares Transportation Average ETF (IYT - Get Report) , which is down almost 14% year-to-date. Since there is no inverse transportation ETF available, he said the best alternative to profit from the crashing of the transportation stocks is through negatively addressing the IYT.
To make his case against the transports, Sagami points to the decline in the China Containerized Freight Index (CCFI) which tracks the rates for shipping containers from Chinese ports to major ports around the world. The CCFI dropped to 820.9 last week, is 22% below where it was in February, and 18% below where it was in 1998 when the index was created.
He added that rates to the U.S. have dropped the most. Rates from Shanghai to the U.S. West Coast ports are down 33%, and the rates to East Coast ports are down 41%.
On the topic of a slowing China, Sagami said his bearish strategy for the country is to own the the ProShares UltraShort FTSE China 50 (FXP - Get Report) , which is down 1.5% so far this year, but up over 23% in the past three months. The ProShares UltraShort FTSE China 50 seeks daily investment results, before fees and expenses that correspond to two times the inverse of the daily performance of the FTSE China 50 Index.
"I don't trust any of the numbers coming out of China," said Sagami. "The only politicians more dishonest than the ones in Washington D.C. are the ones in Beijing."