Stock Market -- Fundamentals

When my core fundamental indicators all flash positive, it normally denotes the onset of a
high return / low risk cyclical bull market in stocks. I call it an "easy money" bull because it
reflects an accomodative monetary policy and it normally covers the powerful early segment of
a cyclical advance in stocks. The core indicators have supported the market's advance for over
two years.

There was a notable exception, however. This occured from the end of Apr. 2010 through the
end of Jun. 2010, when the market sold off heavily in response to the temporary withdrawal of
monetary liquidity injections by the Fed. I did not get a signal that the early phase of the bull market
had ended. That would have required all of the indicators to turn negative whereas only the
liquidity measures did. However, this was a frustrating period because the sell off that took place
over Apr. / Jun. last year was outsized relative to the normal behavoir of the market when an
"easy money" signal holds sway.

When I look forward to the wrap up of QE2 at the end of this Jun., it could turn out that all of
the core indicators turn negative save for short term interest rates, which the Fed could elect to
suppress. Experience over the past two years has shown that the Fed can withraw liquidity from
the system without forcing up short rates provided private sector credit demand is quiescent.

I raise these points because if the Fed votes not to enlarge its balance sheet for an extended
period after 6/30/11, some traders may elect once more to take money off the table from the
stock and commodities markets even though some of the key evidence that normally marks the
end of an "easy money" bull may well be absent.

The issue of the direction of monetary liquidity after Jun. 30 is a factor which may weigh on
market players minds between now and then. As a trader, I can adjust to bumpy capital and
commodities markets as can most other seasoned players. However, I do have a darker
concern which has to do with whether market turbulence, should it occur, could negatively
affect business confidence, hiring and investment. It may be coincidence, but hiring did
suffer after the Fed pulled the plug on QE1 late last winter.

More is in store on these thorny issues in the weeks ahead.