Stock Market -- Weekly

Fundamentals
1. The market normally responds very positively to quantitative easing by the Fed. There
is a powerful QE program underway which has been the primary source for the powerful
market rally underway since late 2012. The surge of monetary liquidity into the financial
system has been strong enough to encourage determined push-back from the conservative
members of Fed's board, but, since the economy has so far responded only anemically
to the program, the Fed's "hawks" have been held in abeyance.

2. QE faces important economic headwinds now including much sharper fiscal drag, a
still strongly conservative banking system and a business sector which has remained slow
to hire and even slower to reward labor productivity. There appears to be a growing number
of stock market bulls who are happy to tolerate very sluggish business sales and earnings
growth on the premise that a continuing meek economic expansion will keep large scale
QE in place and allow excess liquidity to flow into equities and some other assets, such
as housing prices. Players have been using this rationale to chase stocks higher, figuring
the continuation of QE will provide a large stream of liquidity to support the inflation of
the market. Good luck with that. Meanwhile, since a meaningful re-acceleration of real
economic growth is not yet suggested by my favorite leading indicators, I am reduced
to hoping such will show up soon.

Technical
The weekly chart shows the SPX in a powerful uptrend since the latter part of 2011. The
strong market is both heavily overbought and extended, but the indicators have yet to
signal that a break down is in store. SPX Weekly

I also have a link to the cumulative NYSE adv / dec line. The market tends to stay on a
positive course so long as the weekly a/d line can stay above its 6 week simple moving
average. NYSE Advance / Decline

Stock Market Sentiment

I have been tracking advisory and related market sentiment for longer than I would
care to remember. This type of data is helpful in determining when attitudes are
either too bullish or too bearish, but is not so helpful when it comes to shorter run
trade timing decisions. Sentiment is too bullish now, and on balance, is the most
bullish since 2007. Even so, % bullish measures lag the very high readings of the
1990s. What I watch for from a timing perspective are occasions when the bulls
start leaving the party even as the market goes up. Not all advisors and investors
are dummies, so on the premise that the smart money leaves early, you watch for
overly bullish sentiment begin to fade ahead of the market. Sometimes the fading
process happens rapidly, but you can often find yourself with a little headstart. Right
now, sentiment is too bullish but it has been relatively stable since it moved to excess
in Feb. of this year. You can check in here weekly and keep your own data and charts.

NIKKEI....

I did some long side trading in the $NIKK following the 2011 quake / tsunami partly
because of the old maxim that chartwise, all price gaps get filled. The trades were
ok, but it took quite some time for the market to fill the gap down in price that came with
those horrible events. Japan has taken a turn to heavy duty QE in an attempt to bolster
its very low growth and to shake off deflation pressure. This move has triggered a
parabolic run up in the NIKKEI since last Dec., a run which has created one of the
strongest overboughts ever seen in the modern era for a major market. On its way
up, the index experienced several gaps up in pricing and you have to wonder whether
and when the larger gaps will be filled by corrective price action. $NIKK Daily
Truly rowdy stuff.

SPX -- Daily Chart

After the SPX fell to 1542 on 4/18, a new, supercharged postive move was started to
add to the decently strong rally in place since 11/12. The sharp trajectory of this new leg up
coupled with the mild erosion of trading volume suggests a blow off move where poorly
disciplined traders flat chase stocks higher as prices are marked up steadily ahead of them.
So, we have a well defined powerful advance which has grown progressively overbought
and more rowdy. Just to give you a feel for how this advance has gone, there is 6 month trend
support all the way down at the 1580 level and longer term cyclical trend support down around
1470. Thus, there could be a correction as large as 12% without a violation of the primary longer
run trend. SPX Daily Chart

Economic & Profits Indicators

Leading Economic -- Weekly
Both sets of weeklies were strong over the Jun. '12 - Feb. '13 period. The uptrends have
broken and both WLIs have turned flat since Feb. These indicators can be volatile, but
right now no acceleration of economic growth is indicated. Monthly new order data
from purchasing managers has followed a similar pattern.

Coincident Economic -- Monthly & Weekly
The monthly series from Economic Cycles Research (ECRI) shows good progress for
the economy over the second half of 2012, but has been flat since, indicating growth
acceleration has gone into eclipse. The weekly series shows ever so mild progress so
far this year (BOJ).

My Customized Coincident Economic Indicator
It follows others, but I use total civilian employment and real take home pay instead of
payroll and wage data. Measured yr/yr, the economy is performing well when the %
change is 3.0 or stronger (last seen in 2011). Currently my coincident indicator is up
but 1.2% yr/yr. This reading may be lower than others you see because I have factored
in the recent increase in the payroll tax from 4% back up to 6%. By my measure, the
basic economy is in a cyclical growth momentum downtrend dating back to Feb. 2011,
when the indicator posted a strong 3.8% reading. The main problem areas continue to
be slow employment growth and a progressive deceleration of real take home pay
into negative territory. This is a very dreary economy.

Profits Indicators
S&P 500 12 mo. net per share is running close to $99.00 going into May. April was a
weak month for profits yr/yr as both volume growth and pricing power were low.
Margins may have also been clipped for industrial companies as the price / wage
measure was unfavorable.

There will needs be a considerable acceleration of top line growth ahead to move S&P
net per share off and up from the $100 annual level now in evidence. Many players are
confident that nearly global QE from the world's central banks will result in stronger
global economic progress. Not quite yet, but devoutly to be wished for.

Gold

Longer term readers know I have been shorting the gold price periodically through
ETFs since Oct. '10. I have used small positions to generate good profits but have put
more capital to work after gold broke down so badly to the $1350 oz. level. I closed
out another short today figuring the gold bugz would scramble to hold support again
down around the 1350 level. At $1364, the spot price is now about 17% below its
40 wk m/a and since I regard -20% the 40 wk m/a  as a very large oversold, I had
another reason to book the gain. Weekly Gold Price

The bugz will be fortunate to escape another test of the $1350 level which is likely to
come sooner rather than later. The chart shows my view that the new battlefield for gold
is the $1550 - 1350 level. A simple view of the chart suggests this range could be in
place for an extended period, but as I said last month, gold is simply too volatile to
expect that to happen. And here we are already set up to test the lower end of the band.

There continues to be strong rotation out of gold and into equities. SPX Relative To Gold
The new QE program has been a boon to stocks but not to gold because the QE program
is bound by a relatively tight upper limit for inflation and because the CPI itself has
decelerated sharply from a cycle-to-date peak of 3.9% yr/yr for Sep. 2011 down to 1.1%
recently. This rotation is fabulously overbought as traditional equities players have left
gold to return to the old homestead. It will be fun to watch the relationship going forward
as gold is deeply oversold while stocks are getting heavily overbought.

30 yr Treasury Bond

First up is a link to the 5yr. daily chart for the long guy. US 30 yr. Treasury % Yield

The downward break in the yield range of 4.70 - 3.50% over the second half of 2011
in part reflects the increase in confidence the Fed would continue to maintain a ZIRP
policy for short rates. But the sharp downtrend in the long Treasury yield from 2011
through the first half of 2012 also heavily reflects a deceleration of the growth of
industrial production, weaker sensitive materials prices, a fall in the factory operating
rate and, not least, a sharp deceleration of the CPI measured yr/yr.

Since mid - 2012, there has been a minor pick up of industrial output and sensitive materials
prices. Those two factors alone account for some of the muted recovery of the 30 yr.
yield, but I suspect the major factor was the kick off of a new and aggressive QE program
by the Fed. QE is seen as bearish for the bond market because players presume it will
lead to faster economic growth and inflation. However, the rise in the long Treasury yield
has stalled recently because economic and inflation data have started to turn soft despite
the large, still relatively new QE program. Treasury players are no longer so sure that
QE will work to push the economy to faster growth and that higher inflation will result.

Sensitive materials prices have been more stable recently, and oil and petroleum product
prices have started to move back up. Thus the downward pressure on the inflation rate is
likely to ease and this plus the ongoing large QE program is likely to keep bond traders
hesitant to jump in and push yields down hard. The wild card now is whether the fresh,
weaker economic data is a fluke or not. The volatility in the long Treasury yield in the range
of 3.25 - 2.80% could continue for several more weeks as traders sort out the economic data
ahead.

The current message from the Treasury market to the equities market is to be more
circumspect.

Stock Market -- Perhaps For You, But Not For Me

Economic progress in the US is just too slow and fragile to hold my interest on the long
side of the stock market. My proxies for US business sales are growing only about 2%
yr/yr which is way below a respectable growth rate of 6% (to include inflation). Despite
the very large $85 bil. per month QE program from the Fed, there continue to be
headwinds that are curtailing progress, most notably growing fiscal drag, declining real
incomes for wage earners, a business sector that has been too cautious and neglectful of
the workforce except for those at the top, and a banking sector still too preoccupied with
maintaining liquidity and rebuilding capital. Companies can still find ways to slash costs
and maintain margins, but for now the economy is too doggy to support confidence for
the future. So, despite the ongoing QE, a liquidity trap has been forming and I now regard
the stock market as unattractive. Given the market action so far this year, I am now in
a small minority. I am not calling a top as I see the strongly positive interest in equities
that has been underway. I say only that value has been left behind for a momentum play
and that until the US economy can muster more sustainable strength, a now dreary outlook
for maintaining sales and profits growth should eventually catch up with players' thinking.

US economic performance continues to be very disappointing and a large gap has opened
between our potential and how we are actually doing. Perhaps in the end, QE will
undermine the headwinds enough to put the US in a stronger, more balanced position, but
I want to see this first. And, perhaps official Washington will eventually realize the
damage fiddling with austerity can do, but I want to see this first. Finally, the betrayal of
the public trust in Wasington has been so harrowing that perhaps some may come along
to pull the chestnuts out of the fire, but I want to see this first.

From a trading perspective, I have made a tidy sum. Look back at posts in late 2008 and
early 2009 and you will see how early I turned bullish. Believe me, this market owes me
nothing. Now my concern has turned to the need for this great land to start doing better.
Of course, I'll keep the posts going and try to hold the editorializing to a minimum. After
all, how many old line classical liberal Democrats are left?