Stock Market

Fundamental
My weekly cyclical fundamental indicator is right around its low points so far this year, and
further declines in the weeks ahead would put it in a downtrend. Overall for 2011, the indicator
suggests the market should be flat for the year. But, since the SPX is down 10.7% YTD, it is
clear investors are discounting a further decline of economic momentum. Clarity on this point is
difficult, because players have also been trimming the market's price earnings ratio in the wake
of sharp, fast price declines in both 2010 and this year.

Although financial system liquidity excluding the direct effects of the QE programs has been
improving, the market has yet to show that it can sustain a positive bearing in the absence of QE
or its clear prospect. Moreover, neither has economic momentum. My view since late 2010 has
been that I am more curious than bullish about the market, particularly because we knew the QE
program had a wind up date of 6/30/11. It has been a little disappointing that investors have
been indifferent to the improving private sector credit situation, something we did not see last
year when QE was needed to sustain system liquidity. Many a bull market has been maintained
without aggressive QE when private sector credit growth has been a substantial underwriter
of economic expansion.

On a long term basis of at least five years out, my fundamental approach, which is geared to not
overpaying for cyclical earnings momentum, suggests that stocks are pretty reasonable at these
levels. This is the first time this approach has generated a positive "signal" since mid 2010,
when the market sold off sharply.

Technical
The market, although deeply oversold in the short run, remains unstable and is in a confirmed
downtrend. $SPX  Note from the chart that the SPX has now put in a triple closing low on a
short term basis. A mechanical buy signal was generated today because the market failed to
take out the recent closing lows. Some traders will like that close, but you can see from the chart
that next week introduces a test of whether stocks can hold important short run support or whether
it will break down into a more nearly full scale bear market. I would also call attention to the
25 day m/a. Sometimes the market bases out until the 25 m/a drops down to to a level much
closer to the base -- in this case SPX 1100 - 1125. Strong downside action next week would
obliterate that hopeful thought for the short run, but a more stable market, even if no rally can be
sustained, would be an interesting sign.