Stock Market -- Technical

As expected based on my 6/2 post, the market has entered a
corrective phase, with the SP 500 down about 7% from the 6/2
close. The down trend was confirmed by rollovers in the 10 and
25 day m/a 's and a break by the market below both. We have
reached a short term oversold level, and it is the steepest since
just after the market's positive turn in Mar.

The SP500 is at an interesting spot now. It is at the bottom of
my short term oscillator channel and smack on support around
880 based on the close. Since today's late rally up to support may
be but a "head fake", I would not get too excited about jumping
right back in. This cute action was too neat by half. A oversold can
be a bad thing to waste, but I plan to sit back for a few days on this
one.

A rally off 880 would suggest to many the development of a range
bound market. We'll see. After such a powerful bull run from
Mar. through early Jun., it is not unreasonable to suggest that a
10% correction off the 6/2 close of 945 down to 850 could well be
in order. If such were to occur, I would have to say that I would
have mixed feelings from a technical perspective about the
future course of the market. But, I plan to worry more about that if
and when we get there.

SP 500 daily chart is HERE.

Long Treasury Bond

Back in late May and again on 6/9, I posted that the long Treasury
was deeply oversold and that advisory sentiment was approaching
being overly bearish. I suggested I would be looking for a counter-
trend long side trade. Well, a rally of sorts has developed, although
it has been a slow one. Sentiment is less bearish now, but the bond
remains substantially oversold against its 200 day m/a. The ongoing
uptrend in the industrial commodities price composite is acting as a
strong headwind as Treasury traders like to stock up on the long side
when industrials weaken. I was hoping for some seasonal slack in
this sector of the commodities market from late June into July,
but that has yet to materialize, either. So, although the price trend
for Treasury is ok, the trade is on shakier ground, pending some
help from the industrials commodites sector. Monitoring very
closely.

Treasury price chart : $USB.

Economic Indicators

The weekly and monthly leading indicators continue to progress,
and signal the US is coming ever closer to closing out this very
deep recession. My business strength index, which made an
astounding cyclical low of just 101.9 for 12/08, has risen to
113.4 through June, with a reading of around 120.0 tantamount
to recovery. So, recession pressure has receded substantially,
and the pieces are all in place for a positive turnaround, including
an exceptionally strong reading for real disposable income of
the consumer sector to reflect a battery of fiscal counter -
recession programs. What's needed now is more confidence to
spend at retail and invest in housing and less emphasis on
building liquidity and savings. The window is there now,
especially after a large round of inventory liquidation, which
has taken production well below consumption.

There is not a ready formula to determine when consumers will
decide to reduce the flow of money into savings and to increase
their spending. At this point, it is much more a matter of psychology
than a macro econonomic fine point. For more on spending vs
savings, go here.

Gold Price "Heads Up"

Gold went out today around $927 0z. It failed to hold the strong
rally uptrend from 11/08 into 02/09, and now it is close to a
further breakdown on a more extended uptrend measured from
11/08 with an intermediate "touch" of the line around mid- April
' 09. This is a charitable read since the lengthier uptrend has yet
to fully confirm by taking out the Feb. high. Failure of gold to
rally over the next 5 trading days could set the metal up for a
deeper correction down to the $800 level. Time to pay a little
more attention.

The gold macro directional indicator has moved steadily higher in
2009 on expanded monetary liquidity, a rising oil price and a strong
rally in industrial commodities. But the indicator has also leveled
off over the past 2 weeks and its trend, like that of gold, is about to
be tested, especially as oil has flattened out and turned a little
wobbly around $70 bl.

Since gold led the rally back into riskier assets off its 11/08 low,
it's worth watching shorter term from a broader perspective.

Daily gold chart here.

The Fed Relies On Its "Gap Chart"

The FOMC finished up today. They left policy unchanged and
commented that the recession and price deflation are easing and
that sustained inflation is not in sight. they are relying on a tool --
the "Gap Chart" -- a tool that has been a cornerstone of monetary
policy for longer than most of you have lived. The chart compares
the trend of production and capacity and measures whether the gap
is growing or retreating. A growing gap means capacity is advancing
faster than production, which means the operating rate for the
economy is receding and that so should inflation pressure. The gap
is huge now, with the operating rate at a low 68% and still falling.
So, for now, the Fed sees no reason to expect a sustainable rise
of inflation pressure.

They have been dead wrong on this since late winter. Inflation
pressure -- measured without seasonal adjustment -- has been on
the rise even as the production / capacity "gap" has opened
wider. The FOMC did not acknowledge this fact today and has
opted to project that continued US and global economic slack will
kill off inflation pressure from rising commodities prices in the
weeks and months ahead.

Commodities players have an accomodative monetary policy at
their backs and are also armed with the knowledge that since the
recession in new order rates has been unwinding rapidly, prices
should improve with needed inventory restocking. When the
economy does come off deep recession, commodities can bounce
sharply on inventory pipeline refilling, only to settle back as
players realize that underlying demand, although set to recover,
must rise from very low levels. That is the Bernanke bet for the
time being. If commodities players, which now include the big
hedgies and long only funds, can keep the markets stoked, the
Fed will fall well behind the curve.

Commodities do exhibit a slight bias toward seasonal weakness
over the second half of the year, but not nearly enough to rescue
the bet. That will require a round or two of profit taking by
the speculators who have had the markets in play.

Inflation (Deflation) Pressure Gauges

12 Month Deflation
The CPI measured yr/yr showed deflation of 1.3% through May, and
the yr/yr CPI for June and July could well give deflation readings of
2.5%. No surprises here, and no surprise that the 2.5% deflation
mark may reflect the bottom on pricing pressure for 2009.

Inflation Potential
The inflation gauges I use appear to have made bottoms here in Half
1 '09. The CPI remains sensitive to the direction of commodities
prices, especially fuels. With a positive monetary liquidity cycle
underway and low short term interest rates, traders have been
running up the petrol sector and commodities broadly as they look
toward economic recovery. Right now we appear on track to see a
reversal of direction in the yr/yr CPI toward inflation on the order of
up to 2.5% by year's end 2009. Commodites are volatile indeed and
the current uptrends are running ahead of the economy. Whether
the action in the trading pits can sustain the direction of commodities
over the course of the year remains an open question. It will be
interesting to see if the Fed's FOMC addresses this issue in its
6/24 statement and at upcoming meetings.

Stock Market -- Long Term Technical

A broad variety of longer term indicators shows that the market has
turned up from one of its weakest periods in history. The one
exception is the Wilder ADX indicator, which has yet to flash a buy
outside of 20 weeks. It has signalled a change in the direction of
the trend to positive, but is moving very slowly toward a full scale
buy. Several indicators, and I have looked at over 10, show that
positive price momentum off the early Mar. '09 low has been very
strong, too strong perhaps for the longer term.

The SP 500 is also nearing a very important downtrend line that
extends from the May, '08 rally and catches the Aug. '08 interim
high. This line down is significant because the market rapidly fell
apart into a crash shortly thereafter. So this will be a big test of
trend out ahead. The market is now well through and past the crash
down lines.

The SP 500 13 wk. m/a is rising and is threatening to pop above
the 40 wk m/a. Some technicians call this eventuality a "golden
cross" which is seen as providing a confirmation of a durable
advance (providing the 40 wk m/a soon turns up, too). CHART.

Measured on a 40 wk. price oscillator, the market is but rather
mildly overbought. But, when I go out one derivative and look at
that oscillator against a 13 wk. average of itself, I see an
extremely overbought market. Here again, the momentum has
been uncharacteristically strong, even for the onset of a cyclical
bull market. To be to the point, the trajectory of this advance
is nearly twice normal, which suggests that at some point out there
in time, there will be a sharp price correction or extended period
of range bound consolidation or both. In short, when viewed long
term, we are contending with a price rocket.

Now, because the SP 500 took out its 2002-03 lows during the
crash late 2008 - early 2009, we not only ended a long term bull
market, but we have entered a bear market of indeterminate
length. We can see powerful cyclical advances during such a period
and we do not have to plunge to even fresher lows at some point.
But we have to recognize the possibility.

From a short term perspective, resolution of the price rocket
issue is not necessarily a worry. We could see a moderate
correction and a tradable rally in the interim. However, looking
out a month or more, resolution of the price rocket saga could
become more pressing.