About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, December 30, 2015

Financial System Liquidity

The Fed's balance sheet and the monetary base both have been flat for a year now, but there is
still solid residual growth in the M-1 measure which lightens the stress from the shutdown of QE.
The US economy and the stock market have held up decently. Private sector liquidity growth has
been adequate to fund a modestly expanding real economy and low short term interest rates and
non-existent current inflation have kept equities players from abandoning stocks where they can
earn 2.2% to hang around and see how 2016 shapes up.

The banks have been expanding the loan book with more categories seeing rising outstandings.
The system is not aggressively chasing deposits but has been content to ease up on balance sheet
liquidity constraints to meet higher credit demand. Overall, the banking system and consumers
are maintaining sufficient confidence to underwrite modest economic growth in the absence of
further quantitative easing by the Fed.

Private sector funding has been growing at around a 5% annual rate for a number of months and
with  low real output growth and zippo inflation, the system has been generating more liquidity than
the economy actually requires. However, the capital markets have not benefited as investor
confidence in both the stock and bond markets has deteriorated as measured by widening credit
quality spreads and the progressive loss of positive price momentum in stocks overall. In fact,
institutional money market holdings in the US have increased by over $100 billion or nearly 9%
over the past 18 months and the guys appear ready to see the new year ushered in before
getting off their hands.                                                                                                                                                                                          

Wednesday, December 23, 2015

Oil Price Quickie

Historically, the oil price tends to  experience seasonal weakness from early October through late
February of the following year. Interestingly, during this interval, there is a brief period when oil
tends to rally, and this occurs over the second half of December into very early January. I bring
this issue up to caution longer term players who have an interest in getting long oil and related
stocks that price weakness often re-asserts itself after the new year begins. In an ideal seasonal
pattern, the oil price tends to make its low in late February when it is time to build the gasoline
stocks up for the driving season ahead in the northern hemisphere. Seasonal patterns suggest
seeing what January holds in store for the oil price except for shorter term traders. WTIC Weekly

Wednesday, December 16, 2015

Changing Stock Market Fundamentals

With the decision by the Fed to raise short term rates by 25 basis points, the "easy money buy"
rating I have had in effect since very late 2008 has ended. With primary fundamentals now
negative I have a "tight money sell" now in place. The stock market can rise from here, but it
is no longer rated attractive as an investment but only as an occasional trade. This is only my
preference and others will surely disagree. Primary liquidity measures, the direction of interest
rates and measures of financial market confidence are all negative. I also flag the Fed view
expressed today that as short rates reach 'normal' levels, the Fed will consider selling or allowing
securities held on its balance sheet to run off. That possibility, although may be sound in theory,
has proven disastrous in practice.

Whatever the return potential for stocks may be going forward, stock market risk is now substantial
and rising.

I do follow a group of indicators I regard as secondary and it is a mixed bag at present. The positives
represented are no evolving liquidity squeeze in place, ample private sector credit driven liquidity
relative to the present needs of the real economy, and modest levels of 'sideline' cash reserves. The
negatives are obvious -- an ongoing earnings recession and the high level of valuation.

The upshot here is that the future direction of the stock market is now much more difficult to

There are a couple of more important factors here.  One is 'career risk'. It has been a lengthy
bull market, the economy is just muddling along, and stocks are expensive. There may be
a number of players out there who have all manner of reservations about the market outlook.
However, if positive price momentum develops and seems like it may have staying power,
many players will hang in there because they do not want to lose clients and their jobs.
Also, in a rising interest rate environment, investors may be inclined to move a portion of
assets out of bonds and into stocks. Finally, we will have to keep an eye on the oil price,
as extreme developments there can challenge the market.

Sunday, December 13, 2015

Stock Market -- Quick Weekly Profile

The charts and text below are meant to benchmark the stock market ahead of the Fed's policy
meeting this week. 

Value Line Arithmetic Index (Unweighted)
$VLE is a 1700 stock composite that captures universe of US stocks that are most popular. $VLE 
The powerful uptrend dating from late 2011 ended earlier in the year and the index has been
flat although volatile since mid -2014 reflecting ending of huge QE 3 program, and peaking of
economic growth momentum which has ushered in a mild but persistent decline in profits that
does not yet show signs of a positive reversal. Note persistent decay of indicators since late '13
but with no sustainable price break yet.

Cumulative Advance / Decline Line ($NYAD)
Longer term but cyclical uptrend ended earlier in year and moderate breakdown is underway
as breadth is shrinking with investors becoming more quality and liquidity conscious. Recent
failure of A /D line to take out its 40 wk. m/a on rallies is a shorter term warning sign for the

Buying Vs. Selling Pressure
My preferred indicator is the NYSE measure, or $TRIN. Readings on this measure above 1.5
for the weekly TRIN on the basis of a 6 wk. m/a suggest a strongly oversold market which was
evident in Q 3 '15. Following the recent rally in stocks the TRIN has moved into more neutral
territory but continues to show milder net selling pressure.

Friday, December 11, 2015

SPX -- Daily

With the variety of fundamental crosscurrents in play over the past couple of months, I have been
letting the technicals serve as the guide to the market short term. I cashed out of stocks on Nov. 2
and in posts on 11/9 and 11/20 I cautioned about the failure of the SPX at resistance at 2100. I even
conjectured that with failure to breakthrough resistance, the SPX could fall into the high 1900's. We
are getting close to that area now. SPX Daily

The SPX has been trending down since early Nov. from a powerful short term overbought and is
now heading into oversold territory and could well have further to go. Now, market fundamentals
are set to return to the fore right ahead as the Fed's FOMC decides whether to raise short term
rates at its meeting over next Tues. - Wed. as it has been almost unambiguously hinting. If They
go ahead and do it, the increase will come with the strong suggestion that an eventuating uptrend
will be mild and gradual and that short rates could be allowed to fall subsequently if circumstances
warrant. If this is the correct scenario, players will have the next week or so to sort out further
how much risk each feels is appropriate in a tighter monetary environment which features rates still
at historically low levels. If the Fed decides at this meeting that It does not want to push up short
rates, then investors will have to sort out the Fed's 'take' on the outlook. Certainly, the Fed would
look silly if It postpones the decision and implies "well, may at the end of Jan. '16 we'll look at
it again".

I have never seen much value in trying to psyche out the Fed. I do not see a good case for raising
short rates, but all of us will have to play it as it lays next week. 

Wednesday, December 09, 2015

Oil Price

The recent decline in WTI crude below $40 bl. beckons the imagination to wonder if the world is
going retro to the decade ending in 2004, when crude ranged from $20 - 40. WTI Monthly Back
in that period, spare production capacity at the wellhead averaged near 4 million bd., a tidy amount
on a much lower base of oil supply / demand. Oil production surged in recent months at what may
well be an unsustainable pace, and if demand grows moderately in 2016, spare capacity may be at
only a little over 1.5 million bls. a day, even factoring in expected larger output from Iran. Cover
stocks are currently put at 3 billion bls. which is triple the size of inventory held a decade ago and
represents a dramatic increase in cover stock investment, no doubt.

Even with the large increase in stocks on hand, eventual tightening in the balance of production
capacity and demand may eventually lead to stabilization of the oil price, followed by a modicum
of recovery.

There has been a dramatic bust in the price of oil on expanded relative supply, but not a bust
in the global industry. In the 40 odd years there have been price busts in oil where excess capacity
at the wellhead ranged between 4 - 11 million bd. Seen historically, the supply / demand balance
currently is fairly tight. However, financial speculation in this industry has at the least quintupled
over the past ten odd years, which I strongly suspect has added greatly to the volatility of the
oil price relative to the fundamentals of the industry.

It is clear the oil price remains in a bear market with periodic moments of panic, and now that
the price of WTI crude has broken major support around the $40 area, the tensions among players
are palpable. The market is once again moving toward an intermediate term oversold condition,
but since OPEC timed the elimination of production constraints for the current seasonally weak
period, one cannot rule out a fast spike down in price. But, as importantly, folks need to recognize
that given what a high stakes game this has become, any perceived improvement  in fundamentals
could trigger a surprisingly positive response in the price of crude. $WTIC Weekly

Friday, December 04, 2015

Monetary Policy

Back on Sep. 15, I argued that a review of the cyclical indicators that have held sway in the Fed's
decisions for setting interest rate policy since the end of WW 2 suggested that if anything,
the Fed should be easing policy. In view of the continued weakening of economic momentum and the
further development of economic slack via falling facilities operating rates, that opinion remains
warranted in my view. In Its apparent desire to raise short rates as 2016 fast approaches, the FOMC
has resorted to spin to make its case. Perhaps a couple of bumps up to short rates will do no economic
damage, but it is costing the Fed credibility and the twists and turns of Fed communications  are
adding needless volatility to the markets (Draghi over at the ECB is faring no better in this regard).

To compensate for an obvious indiscretion, the Fed promises to be sparing and gentle in raising
rates so as not to be too disruptive to the economy and the markets. This is good to know since the
US economy and stock market have yet to prove they can transition away successfully from a
strong dependence on large scale quantitative easing toward dependence on customary internally
generated resources.

With falling net per share and an elevated stock market, the S&P 500 is now trading just slightly
below 20 x latest 12 months earnings as the Fed prepares the next round of monetary tightening.
I have the market as significantly but not yet outrageously overvalued. 

Monday, November 30, 2015

Stock Market Sentiment

Market sentiment from a contrarian perspective is still running on the bullish side on one of my
favorite measures -- the equities only put / call ratio. $CPCE

When the 30 day m/a of the equities put / call starts running above the .70 mark, it is often an
indication that traders are growing too bearish and that it makes sense to look for a market rally.
Such is what happened at the end of Oct. this year when the market sharply reversed to the
upside following a genuine price correction, and I note that sentiment despite a strong rally is
still very subdued on 30 day m/a. Also, I note the 200 day m/a of the put / call ratio is rising
toward the .70 level. The last time the 200 day m/a for this measure rose sharply toward the
.70 mark was in late 2011 when it presaged development of a powerful up-move in the SPX.

Sour sentiment can get more sour, but I would at least make a note that we have not seen this
kind of  protective action by traders since the heavy pullback in 2011.

Sunday, November 22, 2015

Gold Price

Amidst a longer term bear market, gold did have a couple of rallies in 2015. However, given the
inherent volatility of the gold price, playing on the long side has been barely worth the candle.
Gold Weekly

The gold bear reflects a substantial deceleration of inflation since latter 2011, weak commodites
markets, a softening of global economic growth in recent years and a sharp rise in the US dollar
since mid - 2014.

The chart is a classical bear market chart with gold having suffered two major price downlegs
since 2011and with the possibility of a third and final leg down in price to come some time ahead
a live option.

The global economy has been growing but not at all fast enough to push operating rates up to
counter significant global overcapacity. Moreover, ongoing financial stresses in the capital markets
have been mild and not broad enough to trigger a flight to gold. Global new business order rates
have been positive since Q 3 2012, but because of the magnitude of capacity overhang, excesses
are being corrected slowly via the painful process of plant closings and mothballing.

There are a couple of things that render gold worth keeping an eye on. The gold price is approaching
an oversold on intermediate term RSI, speculative long side interest is low and has plunged in
recent weeks and the USD is struggling to get above resistance at the 100 level (Top panel of the

Friday, November 20, 2015

SPX -- Daily

There was enough positive energy behind the SPX to see it push above resistance at 2100 this
week. SPX Daily

That it did not plainly suggests there is still overhead resistance in the 2100 area that the market
must plow through to move higher. So, if you are on board on the long side, you will have to wait
it out for a while longer and keep in mind this week's fail will get at least a few traders to explore
dumping some shares for the short run.

Wednesday, November 18, 2015

Oil Price

I have been trading the oil price for over 40 years. There has been more good fortune than ill. Yet,
over the past 15 months the track record on calling price has been no better than 50%. My estimates
for global oil demand have properly exceeded the consensus but the increase of supply has been well
above my estimates. Nowhere in time has this been more true than the past five months, when my
guess of a seasonal peak 2015 price of $70 a WTI bl. was way off the mark. Historically, when players
get the price of oil wrong, it is because of oil demand forecast errors rather than bad guesses on

Looking toward 2016, my guess has been that crude would average in the mid - $50s for the year.
I am not going to expend time trying to defend this now, but concentrate more on the oil price techincals
instead. I have made shifts in focus like this in the past and often they are helpful. So, let's look at
WTIC Weekly

Oil has been in a deep bear market since mid - 2014. The bear has been confirmed this year because
oil price rallies have failed to take out the 40 wk. m/a on two occasions so far. The price is modestly
oversold against the 40 wk m/a, and is turning to oversold on the 14 wk. RSI. There has also been
a positive but inconclusive turn on MACD. Note too that oil stock traders have turned a bit more
positive on the market in recent weeks ( XOI oil index in the top panel). Expectations for crude
have turned up in mild fashion and at this point, it is important from a technical perspective that
crude hold support at $40.

I have done my mea culpa and I am probably going to stick with this intermediate term perspective
chart in the months ahead.

Tuesday, November 10, 2015

US Dollar -- At Interesting Point

With the Fed now out of the business of QE, and with sentiment again swinging toward a more
nearly imminent "lift off" in short rates, the dollar is on the rise again to salute a prospective,
more full blooded tightening of policy by the Fed. $USD

What is interesting here is that not only is the dollar overbought in the short run, it has also formed
what could be a secondary top. It made a strong, momentum driven top in the spring, then corrected
moderately, and is now back up to near the 100 level on the index. Sometimes, this sort of process is
merely establishing a platform for a breakout move, and sometimes it signals that the index in
question is running out of gas and is setting up for what may eventually turn out to be a stronger
correction from what is becoming more formidable resistance. Check out the price action for
the USD over 2012 - 2013.

Monday, November 09, 2015

SPX -- Daily

As mentioned in the 11/02 post, the SPX was rather overbought in the short term, and as fate would
have it, it has hit a speed bump which has broken the uptrend based on closing prices. SPX

As shown, the market failed in its first test to hold above the newly regained resistance level of 2100.
It should come as no surprise if the SPX was to struggle a bit over the next week or two either through
consolidation or a search for short term support. It has come a long way in a short period of time.
There could be a test of the newly rising 200 day m/a which sits a little below the current level around
2080, or there could even be a more formidable pull back into the high 1900s, which would still
leave SPX in an uptrend captured by the very wide range seen over Sep. / Oct. A development of the
latter sort might alarm a number of traders, but it need not be alarming as it might be suggesting
the SPX is set to follow a modest, but volatile uptrend for a while. There is no forecast from me
here, just the outline of a couple of interesting possibilities to think about in the wake of a very
unsteady three month period.

Thursday, November 05, 2015

30 Yr T-Bond % -- Observations

The 30 yr Treasury long term bull market has not yet ended. It reflects decelerating US economic
growth momentum in terms of industrial output and long run slides in inflation momentum and
short term interest rates. These same factors govern the trend slide in yields as seen on the chart.

Recent data show production at 0.9% yr/yr, the CPI at 0.2%, and the 3 mo. T- Bill near the zero
bound. With a nearly stalled economy, no inflation to speak of and ZIRP, it is reasonable to put
the short term yield band at 3.00 - 3.50% for the bond to represent the premium for all the
unknowns in its prospective 30 year tenure. The bond market has become increasingly accepting
of the Fed's ZIRP over the past five years, and players have also bought off on the persistent down-
ward drift of inflation since 2011 and the slowdown in the growth of industrial output. Ergo, the
T - Bond sits at around 3% presently.

Over the next six months, if there is no further significant erosion in the price of oil and other
sensitive materials prices, the CPI could well "back into" a yr / yr level of near 2%, and the Fed
may move to raise short rates if there is also a modest improvement in real output growth. This
could lead to the sort of sharp run up in the yield % as was seen from 2012 to the end of 2013
when market players guessed (incorrectly) that large QE from the Fed would trigger faster
economic growth, accelerating inflation and an eventual abandonment of the Fed's ZIRP. But it
need not unless the real economy strengthens enough to convince investors and traders that the
US is experiencing  a positive reversal in growth of substance. So, I come out the door that
upward pressure on the bond yield will depend most heavily on the perceived sustainability of
of an improvement in real output growth.

At present, there are just a few hints the economy may soon get past the difficult period of excess
inventory experienced over the past several odd months, but that awaits some confirmation.
Naturally, if we do see a somewhat stronger economy in the year ahead, there should be enough
follow through on inflation to push the Fed to raise short rates gradually. If such occurs, it
may be necessary to scuttle the 3.00 - 3.50% yield band for the bond shown on the chart.

Monday, November 02, 2015

SPX -- You Folks Can Take It From Here

Back in late Sep., the SPX fell to its most oversold levels since late 2011. It has rallied since then
to a strongly overbought position currently. As an old guy who likes the occasional good trade, this
development was manna from heaven. So, I have taken the money and run. As I said when the
market went into its Sep. tailspin, I thought the guys jumped the gun because I could not figure out
a bear case. I conceded the market may have been overdue for a correction, but I did not see the
bear. I still do not, but also do not see the fundamentals as warranting a substantial and sustainable
upside from here. Since I would be happy with SPX 2160 by the end of next year, and since the index
has just topped 2100 again, I am pleased to book a large short term profit and take my chances that
the next 14 months will provide another opportunity or two to capitalize on a deep oversold.

The thinking here is that the easy, low risk, high return money has been made. It has been a neat
bull market from early 2009. The Fed is no longer providing the wonderful liquidity tailwind from QE
and the stock market is expensive on a valuation basis. There are some interesting bull stories that
are incubating now, but as Warren Buffet was fond of saying, this is a game where you are the batter
and there is no umpire and thus you can wait for your pitch. I plan to keep the blog going as before,
but when it comes to US equities, you now know where I stand.

SPX Daily

Friday, October 30, 2015

SPX -- Monthly

In posts on Feb. 27, and April 3, I called attention to the rollover of MACD on the SPX monthly
chart and how prior flops in this measure over the past 20 years presaged trouble for the stock
market. The rollover of MACD occurred as the first quarter of 2015 unfolded, and the SPX has
yet to recapture the 2100 level seen earlier in the year. SPX Monthly

My concern over the past year has been that on the rare occasions when very large QE programs
are brought to an end by the Fed, the stock market has suffered, and on most occasions, the economy
has as well. Point - to -  point, the SPX has been on the flat side this year, and the momentum of
business sales and earnings have eroded, with SPX net per share having gone mildly negative.

Because of the erosion of business sales and consequential profit margin pressure, one cannot say
yet with confidence that the economy has escaped this first round of strong tightening in monetary
policy and is readying to expand at a moderate pace. True, the evidence from the GDP accounts
reveals that real final demand growth has been sustained, with the volatility in performance heavily
reflecting a mild inventory accumulation / dis - accumulation cycle prompted by harsh winter
weather, the continuing effects of a strong dollar on export sales, and builds in hydrocarbon supplies.
What is troubling, however, has been the persistent decay in monthly economic data, with subdued
production and sales growth trumping reasonably good jobs and real income growth. But, so long as
jobs growth does not slow too quickly in the months ahead, the economy may be able to regain
better balance.

I outlined a mini economic and profits forecast back on Sep. 27, in which I posited that the US
economy and profits should improve. However, because the p/e on the market remains elevated,
I wonder whether the market has strong and sustainable upside from the current SPX level of 
around 2080 and whether, as the monthly chart shows, we may have already hit the peak in
the strong MACD progression in evidence over 2012 - 2014. This may be a conservative view,
but it is where the battery of indicators I work with leave me.

Sunday, October 25, 2015

SPX -- Weekly

The SPX is on the verge of an intermediate term buy signal, but there are issues. The market is getting
overbought short term, the Fed has a policy meeting this week, and we are about to enter a "bring on
the clowns" period in the nation's capital where spending bills are on the line, the US debt ceiling must
be raised, and where Speaker Of The House (Paul Ryan) faces his baptism. Upcoming as well, are
a bevy of PMI reports on business activity spanning the globe and info on China's new five year plan.
So, there could be some short run volatility to becloud the market outlook.

The market has responded positively and powerfully from the lows seen in Aug. and Sep. SPX weekly
The SPX has moved up and through its 13 and 40 wk. m/a's and although the trajectory is too sharp
to be sustained, the indicators are well below overbought levels when viewed over the intermediate
term (3 to 6 months). The signs do not of course preclude a disappointment but they are promising.

With the market having risen rapidly up to and through its 40 wk. m/a, my momentum oscillator is
about to turn positive from a deep oversold for the first time since the final quarter of 2011 ( I do
not show the oscillator on the chart, but it very closely resembles the MACD  which is displayed in
the first bottom panel of the chart). Looking back over more than 30 years of data, since whipsaws
in the signal come seldom when momentum is sharply depressed, the oscillator and the reversal of
the MACD should not be taken lightly. It is unfortunate that the MACD reversal has come only on
the heels of an already strong rally, which confirms the short run overbought in the market.

Thursday, October 22, 2015

Stocks Rally -- Significant Test Ahead

With today's sharp rally, the SPX is fast becoming decidedly overbought on price momentum
with elevated RSI and MACD readings also ascending. Also of major short run importance is
the fact that the SPX is sitting right under the 200 day m/a. Failure to take out the "200" in short
order would normally be a good time for traders to take profits and may well have more
substantial negative consequences. Watch closely. SPX Daily

Wednesday, October 21, 2015

SPX -- Short Term

Deteriorating economic growth momentum and a weaker dollar has encouraged market players
to shift expectations of an eventual "lift off" in short term rates further out into the future and has
even prompted discussions about what options the Fed might have to ease monetary policy in a
in a ZIRP world. With bond yields so low and commodities and PMs remaining out of favor,
players have used a deeply oversold stock market to expand equities exposure. the deep oversold
condition has vanished, and with a variety of different concerns still nipping at portfolio managers'
heels, there has been a relatively strong but volatile rally from the Sep. '15 lows. SPX Daily

At present, the economic and profits outlook is rather subdued. A significant pickup in business
sales and earnings, should one occur, will bring the questions about when and how fast the Fed
might raise rates right back to the fore. In the meantime, players are again smitten with the "Rule
of 20" -- a valuation scheme that pegs the market's p/e ratio according to the rule that p/e = 20
minus the inflation rate. With inflation very low, adherents of the rule see upside in the market
even if profits growth is minimal. The "rule of 20" has been popular since the mid - 1960's and
is again filling in nicely in a slow growth, low inflation and interest rate environment. It is ok
to be leery of this type of thinking now, because it is a "thread the needle" argument in an
environment that lacks clarity and is risky in that the Fed has already tightened policy substantially
via shutting down QE a year back (the market is little changed from last autumn when the Fed
ended the QE program).

I have the market mildly overbought. It is trading below the 200 day m/a and to have reasonable
confidence that the current rally has staying power, the SPX needs to challenge the "200" before
too long and successfully break through it. I would also note that the VIX or volatility index
in the bottom panel has retreated maybe a little fast compared to the recent price action on the

Wednesday, October 14, 2015

Gold Rally

Gold has begun to fulfill my long held speculation that it could rally over Half '2, 2015. The
metal is on its way to a short term overbought on RSI and a rendezvous with the tripping point
resistance level up at $1200 oz. Gold Price

For more on gold fundamentals, scroll down to the 9/30 post.

Sunday, October 11, 2015

SPX -- Weekly

My primary fundamental indicator is still positive. The growth of monetary liquidity remains in a
downtrend but is not yet negative and short term interest rates have yet to reverse and go positive.
My weekly cyclical fundamental directional indicator has been flat now for a year. This indicates
a continuing economic slowdown and has likely bothered the stock market in the absence of further
QE which sheltered stock prices when it was in place.

Last week's strong rally reflects increased player conviction that an eventual rise in short term
interest rates has been pushed out further in time. The now weaker USD also lifts worry some over
the prospect for even stronger currency translation penalties to corporate sales and earnings.

The combination of global economic expansion and new evidence that excess productive capacity
is being shut in has not yet been strong enough of itself to put cyclical pressure on inflation, but a
weaker USD is lending some support to the oil price and selected other commodities. This factor
is relieving some investor anxiety about offshore economic and financial constraints attributed to
the sharp rise in the USD since mid - 2014. US equities players thus need to watch the direction of the
dollar more carefully than usual.

The near term weakness anticipated in the 9/26 weekly technical update proved very short lived.
A quickly ensuing rally eliminated much of the short term oversold position of the market and has
brought the SPX right up to occasional resistance at the 13 wk. m/a. SPX Weekly

The weekly SPX is close to a positive trend reversal if it can decisively take out the13 wk. m/a
soon. However, because it is short term overbought on a price momentum basis, an imminent
test of the downtrend in place is far from assured.

Thursday, October 08, 2015

Tale Of The Tape: Stock Market

The Fed wisely put off raising the Fed Funds rate at its recent FOMC meeting. As a consequence, the
US$ has continued a modest downtrend, and this has sent mild risk - on signal to the markets. The
SPX has entered a correspondingly modest but volatile uptrend. SPX Daily

The 25 day m/a has turned up, and the VIX volatility or "fear" index has retreated from the late Aug.
spike up to 40 down through the technically important level to a more moderate 17.5 (bottom panel).
The market is now moderately overbought short term on a momentum basis at 3.1% above its 25
day m/a and in view of the spike in MACD. A fair number of traders would like to see another test
of the correction lows below 1880 given the extant volatility and the suspicion that even if the
market may strengthen later this year, the correction may need more time to run its course on a
seasonal basis. It hard to pound the table in opposition to this view. I am more interested in  how
the SPX will perform against its 200 day m/a when that day comes. This challenge may be a little
ways off, but when it comes it will be important, since failure to take out the "200" would be a
bearish signal.

Monday, October 05, 2015

Profits Indicators

My US corporate sales growth momentum indicator hit an interim peak of  7.1% yr/yr in Jul. 2014.
Since then it has declined to 1.1% yr/yr currently. The sharp loss of positive momentum reflects
slowing physical volume growth in general, a continuation of a deterioration in product / service
pricing power, a stronger US dollar (translation losses) and the sharp erosion of oil, gas and
sensitive materials pricing power. Note, as well, that global industrial output has slowed from
4% yr/yr down to 2% over the same period.

Normally, such a quick slide in sales growth would lead to substantial downside pressure on net
per share. SP 500 earnings have been declining from an annual rate of $117 per share to about $108
presently, but matters could have been much worse. However, the fall in oil and gas revenues and
in basic materials sales has resulted in significant cost reductions and profit margin improvement
for the many businesses that are net users of such products. Net users of oil, gas and basics manage
to generate 4% sales growth as a group and have seen improvement in selling price / cost ratios. On
top, a number of SP 500 companies have benefited from share buybacks.

Weekly and monthly leading economic indicators do not yet suggest a positive turnaround in SP
500 net per share, and the final calendar quarter estimate for 2015 now looks vulnerable. As posted
below on 9/27, I am expecting to see much improved business sales performance as the economy
moves through 2016 and as the substantial excess liquidity in the economy presently is turned into
higher transaction levels. The risk here remains the same as I have highlighted for a year, namely
that the economy must successfully transition away from dependence on QE liquidity to the ample
private sector internal and credit resources available to it already. The potential for stronger business
performance is surely there. Very soon, business will need to take a collective deep breath and have
the confidence to move on and up.

Wednesday, September 30, 2015

Gold Price

Since late 2014, I had been thinking that the price of gold might stage a nice and tradeable counter -
trend rally over the second half of this year. There was the usual seasonal pop in early 2015 as gold
piggybacked seasonally strong action in the oil price, but the action over Half 2' 15 has lacked any
zip. Gold Price

With the global economy growing slowly and continuing evidence of excess capacity in industrial
production, key gold price indicators such as the oil price, sensitive materials prices, and the CPI
have simply not supported the traditional inflation hedge strategy for gold. Moreover, the $USD
has remained elevated and the US monetary base has continued flat. As outlined in the post just
below on stock market fundamentals, I expect some improvement in key gold price indicators such
as a higher average oil price, a rise in the CPI, and for good measure, a weaker $USD, as we
progress through to the end of 2016. Since the expectations outlined below are not at all dramatic,
gold traders will have to count on the inherent volatility of the gold $ more than they normally do
even if the projections are ball park.

The painful process of mothballing excess industrial capacity could take an extended period of time
so it will be vital to see at least a modest increase in global economic demand to generate much
trader interest in oil, commodities generally, and PMs.

Sunday, September 27, 2015

Stock Market -- Fundamentals Through 2016

My little business outlook through next year would ordinarily be regarded as the plainist of plain
vanilla, but in today's sloppy environment, it seems positively heroic. There is sufficient monetary
liquidity / credit availability in the US financial system to support business sales growth of 5%
and SPX net per share growth of 6% by year's end 2016. This estimate includes improved physical
volume growth and an increase in pricing power from 0% today up to 2%. I expect the WTI oil
price to average in the mid - $50s per bl. and for global economic supply and demand to come into
modestly better balance as demands lifts a bit and on an expectation that shut ins of unprofitable
capacity accelerates. I am looking for the $USD to lose ground down to the 85 - 90 area and for the
the Fed Funds rate to rise up to 1.00% by year end 2016 as the Fed gradually restores normalcy
to the system. The key assumptions in all of this is that US monetary velocity or turnover stabilizes,
and that consumer, business, and banker confidence will support it.

I figure that SPX net per share will increase from $115. this year to $122 next year and that the
p/e ratio for 2016 will be at 17.7x. Thus I look for the SPX to close out 2016 at about 2160 or
modestly above the earlier in this year record close of 2135. If these projections are well in
the ball park on profits growth, inflation and the Fed, the market could receive an extra boost
from significant rotation out of bonds into stocks.

I do have a simple fair value model of the SPX based on longer term assumptions of business
volume growth, the inflation rate and earnings plow back rate. The model has the SPX fairly
valued at 1870 for 2015 and 1985 for 2016.

Every 7 - 10 years the world seems to go through a period when Murphy's Law -- Whatever
can go wrong, will -- begins to nip away at our institutions, economy  and markets. The US
stock market has sometimes sailed right through these periods, but you folks need to be extra
vigilant in the years straight ahead to see where Old Murph might surface, and what disturbing
developments might do to confidence and the markets. We are definitely moving into a period
where shit assuredly happens!

Saturday, September 26, 2015

SPX -- Weekly Technical

The market remains in correction mode and continues on an intermediate term sell signal. Recent
 price action does throw the idea of a quick spike or "V" bottom as occurred over 2012 - 2014
into doubt. My longer term, smoothed momentum indicator is at a mild -4. This compares to a
mild -7 at the worst of the 2011 correction, but does show the market to have near term vulnerability, 
 even if it was to subsequently recover and move well higher in the months ahead.  SPX Weekly

The chart shows significant technical damage to the SPX. The evidence on the chart is not sufficient
to imply that a bear market has begun. Simply look back at 2011 and also recall the fierce, positive
whipsaw that happened in the latter part of 1998. However, even if the market recovers and moves
on, the protracted deterioration of momentum as seen in the MACD  panel of the chart, suggests a
rapid and dramatic positive reversal in MACD would be the less probable case.

The bottom panel of the chart shows the intermediate term stochastic. It is giving an oversold reading.
The norm is to get two of these a year and they are often tradeable even in a more marked downturn.
This is the first one since late 2012. An oversold stochastic reading can whipsaw, but they are always
interesting and require attention.

The reasonable possibility of further near term market weakness notwithstanding, I am guessing that
the market will experience another extended, but mild upturn which could carry to a new high for
the SPX. This is based on a fundamental judgment as opposed to the current technical position of
the market and I would not bet on it until we see positive reversals in the indicators shown on the

Monday, September 21, 2015

SPX -- Daily Chart

It has often been said that the current bull market has been one of the unhappiest in history. It is
true that there has been a continuous litany of caveats, complaints and criticisms. With QE 3,
most of the querulousness was swept aside as the market made a tightly drawn beeline nearly
relentlessly higher. With termination of all QE by the Fed in latter 2014, the path of the market
has been more tortured. Without the big tailwind of a huge period of liquidity growth, the worries
and insecurities of investors and traders have resurfaced. The economy has returned to sluggish
growth, the Phillips Curve (falling unemployment leads to increasing inflation pressure) has been
absent, and the Fed has been talking about returning monetary policy toward normalcy with boosts
to short term rates while the economy continues not to behave normally. With the substantial drop
in the market going into Sep., and a subsequent struggle to recover, market consensus has
dissolved and insecurities reign. SPX Daily

The SPX is no longer oversold short term on a momentum basis. I am partial to momentum
measures on an intermediate term basis and the extended time measures of RSI and MACD are
still deteriorating on a trend basis. So, I have the market on a technical sell signal, and since these
are trend following measures, there is precious little chance I will catch the bottom if a more
sustainable rise occurs.

Other favorite indicators such as the TRIN and equities only put to call ratio contine to signal
that the market is at a substantial oversold position with an elevated p/c ratio and strong selling
pressure captured by a rising by a rising TRIN  

Note also the progressive decline in the % of SPX stocks selling above their 200 day m/a's
(bottom panel) to an oversold position.

These oversolds are tempting and suggest a stronger market is out there in the not so distant
future. The problem is that when players have a welter of insecurities, churning volatility can
continue on for several weeks. (As noted above, I will probably miss the low).             

Tuesday, September 15, 2015

Monetary Policy

2015 marks the sixth year of economic recovery. Yet, it was not until the late summer of 2014
that the expansion was mature enough to warrant an increase in short term interest rates. The Fed
passed on those moments. Now, the indicators that have best worked in the past to forecast that
a rise in the Fed Funds rate (FFR) was timely suggest that, if anything, the FOMC  should take a
step to ease monetary policy. Production growth momentum has been slowing, capacity utilization 
indicates continued slack, banking system liquidity is ample, and the demand for non - financial 
commercial paper has begun to ease.

With a slowing economy based on monthly data, the Fed was correct to pass up a chance to raise
the FFR in 2014 when economic momentum was strong. Here we are now with a sluggish economy
and little if any inflation impetus. Since the economic recovery began in early 2009, the pace of
expansion has slowed significantly in the wake of each QE termination. The monetary policy
factor that has dogged this economic recovery has not been interest rates, but periodic turn offs
of the liquidity tap.

The question of raising the FFR now seems more of an academic issue than a genuine economic
one. Now one could argue that if the fate of the continued progress of global expansion hangs in
the balance because of a 25 basis point increase in the FFR, we have perhaps been deluding
ourselves over whether the world can climb all the way out of the economic hole we dug for
ourselves earlier in the prior decade. So, from an economic perspective, maybe a couple of bumps
up in short rates will not prove very destructive at all.

My concern with monetary policy is whether consumer, business and lender confidence will remain
strong enough to transition away from economic growth driven by central bank expansion of
monetary liquidity to progress fueled by internally generated funds from economic activity boosted
by the continued private sector credit growth. My preference would be to monitor how this
transition is proceeding before pushing up the FFR especially since private sector liquidity appears
adequate to support it. Let's first  see if industrial output can regain momentum with rising operating
rates and if the consequent cyclical pressures start to push up the inflation rate.

Monday, September 07, 2015

Do Not Forget Commodities....

The commodities market remains cheap. Since 1970, the CRB Commodities Composite has spent
precious little time below 200, where it sits now. Granted, that which is cheap can remain so or get
even cheaper. However, since the direction and momentum of the commodities market tends to lead
inflation or, deflation, and since the way commodities go can have a major impact on the general
price level, it may be worth your attention now. CRB Weekly

The top panel shows the yr/yr % change for the weekly price. A 52 week decline is very substantial
by historical standards and it is worth noting that the flattening out of negative momentum through
2015 happens to coincide with a topping pattern for the US dollar (the dollar still rules in the
commodities market). A further run - up in the dollar in 2015, should it weaken the CRB further,
would strengthen the outlook for eventual global deflation, which would be a very undesirable
outcome given the still elevated level of debt leverage in the world. I like the USD long term, but
think it is well overdone to the upside at the current level of 96. It is reasonable down in the 87-88
area in my view.

The CRB and other broad commodities composites remain heavily oversold and are at large discounts
to fair value measures based on cost of production plus a reasonable measure of profit (For more,
see Commodities Market from 7/30/15).

Check out the bottom panel of the chart. It shows the relative strength of the CRB compared to the
SPX. It does not get much lower than the .10 you see there, and since the continuation of the RS
line at .10 extends beyond the downtrend line for RS since the summer of 2012, we might be
looking at an interesting situation, relatively speaking.

Thursday, September 03, 2015

US Stock Market

The Correction 
When I look back on the suddenness and violence of the recent price decline, I still do not see the
sharp outlines of an oncoming iceberg that made the other guys jump ship. Naturally, the history
of the market is littered with price corrections, and Lord knows, one was perhaps long overdue.
However, I still think the guys jumped ship too early.

The correction has greatly widened the playing field as seen on this daily rendition of the SPX 
The market is currently challenging the steep downtrend in place, but with the employment report
and a three day weekend just ahead,  players could wait for the unofficial end- of-summer return
of the heavy hitters next week from holiday. Given the new broader range for the market, an
elevated VIX (bottom panel of the chart) seems appropriate.

The basic market directional fundamentals I use to judge the market are still intact in favor of a
rising SPX although liquidity growth is far less robust. On that score, I ended my low risk
view of the market in the closing months of 2014. At the SPX high of 2135 set earlier this year,
the market traded about 19.5x 12 months net per share. That is an elevated level by any sensible
long term measure. However, although a p/e ratio has substantial empirical content, it is also
heavily influenced by investor confidence. Because of this psychological element, it is very hard
to use valuation successfully to time the market. And so, in this case the market received a quick
p/e haircut on rapidly waning confidence (I hope that players do not go for a buzz cut and bring
the market below crucial support in the low 1860s on the SPX).

I do use a valuation measure based on long term trend earnings and I give heavy weight in estimating
a 'fair value' p/e level based on a  long term measure of the earnings plow back ratio (Higher plow
back implies faster longer term earnings growth and a higher p/e multiple). Long run trend earnings
for 2016 stand at SPX $117 a share, and my fair value p/e based on a 60% plow back ratio is 17x.
So I see the SPX as reasonable at about 1990. Note too, that the previous high of 2135 did not
represent a significant overvalued level with my approach).

There is fear in the market and with guys like me, there is quizzicality. In turn, my indicators show
an impressive oversold condition is also in place. We will just have to see how it all plays out.

Friday, August 28, 2015

US Stock Market -- Some Thoughts

Correction In Place
The SPX fell about 12% from its peak before recovering substantial ground later in the week.
Peak to trough so far, the SPX fell to a sharp and trade worthy oversold of 6.2% against the
25 day m/a earlier in the past week but has bounced to a moderate short term oversold of 3.2%.
It is an open question of how serious the correction is. The SPX has fallen below its 200 day m/a
and the 200 day has rolled over for the first time since 2011. Moreover, like the deep 2011 price
decline, both the RSI and MACD measures have been trending down for several months as lead-ins.
On the plus side, all the sharper down moves in the SPX since the 2011 correction have seen 'spike
low' patterns where recovery has been fairly rapid and where new highs were attained. SPX Daily

Room For Another And Perhaps Final Leg Up?
The cyclical bull is six years old, but there are capital resources -- idle capacity, labor, and credit
availability -- which remain untapped or underutilized and which are sufficient to carry economic
expansion into 2017 if exploited. Bull markets normally do not end until the economy is overheated.

But, to get this last up leg in the market, the economy must continue to transition to a credit driven
expansion which is far less reliant on continued growth of monetary liquidity. The failure of the
stock market to sustain the new highs in 2015, as modest as they were, means there are plenty of
second thoughts among investors concerning whether it is advisable to pay premium p/e ratios
for US stocks in an environment that may be more risky on a global basis (It could be argued that
risks are no higher than they were months ago, but that many players, smitten with the idea of
sustaining high valuations because inflation is so low, have taken off their blinders and have
broadened their focus).

As it stands now, I would be very reluctant to deny another up leg which carries the SPX to new
historic highs. On the face of it, such a continuation of the bull would seem to be modest in
potential. With accomodative monetary policy nearly global in scope now, and with China
especially set to push hard for faster economic growth, US stocks may get strong competition
from foreign markets, oil and other commodities. One offset could be if bondholders, seeing
that the Fed intends to raise short rates gradually but with persistence, elect to trim long dated
maturities and move some of these very large funds into equities.

Wednesday, August 26, 2015

China -- Stock Market Profile

To benchmark the China stock market, I use the S&P China SPDR (GXC) ETF based on the
S&P BMI China Index. The GXC holds over 600 stocks ranging from major cap. size to small.
The CXC has roughly $6.00 in net per share and trades around 11x eps. It is much less volatile
than the more notorious Shanghai Composite. GXC Daily 

Since its inception in early 2007 at a price of $50, earnings for the GXC have grown nearly 15%
per annum. Corporate profit growth in China has slowed down in the wake of the large 2009 -
2010 fiscal stimulus program and the p/e ratio for the GXC has naturally eroded. With China
struggling to meet its 7% per year growth target, the growth of earnings for the GXC in the
future will continue to be more moderate than in prior years. I would rate the stock as reasonably
priced at $65 (The stock is currently $69+).

The GXC caught the speculative fever for China stocks which began to ramp up around mid - 2014.
GXC shot up from the $70 area to close to $100 this year, but has retreated back to the $70 level
in the recent big China sell - off.

It is foolish to think China can become a broadly diverse, stable consumer led economy so soon
in its development. That has to be a long term objective to be worked at. In the meantime, to
stabilize growth, China has devalued the Yuan, is cutting interest rates and bank reserve requirements,
and is accelerating the growth of its basic money supply. The China economy is in deflation and
the PBOC is having to take stronger action to reverse economic growth deceleration. With more
monetary and fiscal support ahead, the GXC is probably fairly near to sold out.

The bottom panel shows the relative strength of the Shanghai to the  GXC. In my view the Shanghai
would probably be reasonably  priced against the GXC at a little below 40x or about 2700. Since
the Shanghai can be very flighty, the 2700 level has to be taken as a very approximate approximation.

Rome was not built in a day and neither will China be.

Tuesday, August 25, 2015

Stock Market -- Risky Business

I have been cautious on the stock market since the latter stages of the huge Fed QE program.
Historically, programs like this represent sustained emergency easing and they are very supportive
of investor and private sector confidence. There have been few of them, but when they terminate,
the absence of the strong tail wind they provide to the economy and the markets can susbstantially
diminish confidence. In the absence of large QE, the economy must transition to a credit driven
recovery / expansion and away from one that is liquidity driven, and so must a stock bull market if
it is to survive.

US economic growth has again slowed down over the past year, but consumer, business and banker
confidence has remained relatively solid. Profits have contracted  moderately on low sales volume
growth and pricing power and have taken a large hit from weaker oil and gas prices with lower
costs for net energy consumers only partially offsetting resource provider bottom line erosion.

The stock market had been using the idea that low inflation and interest rates reduce the equity
investment hurdle rate which should entitle investors to enjoy a higher p/e ratio on earnings. In
fact, the vast proportion of the advance in the in the stock market since the autumn of 2011
reflects the progressive rise of the p/e ratio.

My view on the stock market has been that primary and secondary fundamentals, while they have
eroded, are still positive, but that the termination of the powerful liquidity tailwind from QE 3
reduces positive return potential and raises risk.

I am not smart enough to explain exactly why the market has been so shaky since China cut its
dollar peg shortly back, but I suspect that without the big US liquidity tailwind, investor confidence
is more vulnerable to contrary economic developments. Even so, I have been surprised by the
powerful wave of selling.

The SPX is wildly oversold, and because the economy is muddling along positively, I must say
something I may very probably regret, but this kind of panicky action looks crazy, stupid to me.
SPX Daily

Thursday, August 20, 2015

SPX -- Daily Chart

I have been cautious on the outlook for the stock market since  the roll up stage of QE 3 last
autumn and have argued this year that the bull market was on tenuous grounds from both
fundamental and technical perspectives. The key directional fundamentals in toto remain
positive but have been deteriorating up until recently when there has been slight improvement.
But, I cannot take any credit for the sudden, sharp selloff so far this week. Even though the SPX
is pricy and many solid observers are looking for a sharp price correction, the basic fundamental
framework for stocks has yet to turn negative. So, a tip of the hat to the other guys. SPX Daily

The SPX has entered a short term downtrend. 2015 price support has been has been taken out,
the 25 day m/a is rolling over and RSI and MACD, which have both been trending down, are
weak. The SPX is moderately oversold at a 2.8% discount to the 25 day m/a with RSI also
approaching an oversold position. So, it will prove instructive presently to see how much fire
power the bears are carrying since there is a moderate short term oversold condition in place.

Sunday, August 16, 2015

SPX -- Weekly

Fundamentals & Valuation
Core fundamentals remain positive, but continue to erode. The slippage in the growth of monetary
liquidity continues but at a milder pace and there has been no liftoff yet in short rates. Secondary
fundamentals have slipped slightly but remain in plus territory. Shorter term leading economic
indicators, which turned up in Mar., are moderately positive on balance.

SPX  net per share is running at an annualized rate of $112 compared to $102 for mid - 2011. Thus,
most all of the large gains in the market since the autumn lows of 2011 reflect a sizable increase in
the p/e ratio. Players have slashed the market's discount or hurdle rate to reflect a sharp deceleration
of inflation and a continuation of the Fed's ZIRP just as they did beginning in the 1960's when the
inflation rate began to factor more prominently in market valuation measures (By this token, if
there is faster economic and profits growth ahead, gains in the SPX price level may be subdued if
inflation accelerates and investors elect to scale back the p/e of the market accordingly). The
prospect of faster inflation likely bothers few players now as with excess global production
capacity and slow demand growth, investors are more concerned about mild deflation tendencies.

The indicators with the weekly SPX chart show that momentum last hit a peak at the end of 2013.
The market has advanced since then, but momentum readings have persistently eroded and by
extension suggest the SPX will end up 2015 on the flat side. That is not a forecast, but it is where
we will end up without a substantial positive or negative change to investor psychology. SPX weekly

I have not abandoned the idea that global economic growth will strengthen as the year progresses.
If the global economy does improve, the Fed would likely abandon its ZIRP, commodities prices
would rise some, the dollar would weaken and the SPX could get competition from commodities,
PMs and selected foreign equities markets. Interestingly, China, which has been exporting
deflation for a good several years because of slowing growth and sizable idle capacity, has again
turned more sharply expansive with monetary policy and a change in Its currency value regimen
toward a weaker yuan.

Sunday, August 09, 2015

Stock Market Sentiment

In measuring market sentiment, I prefer to watch the equities put / call ratio simply because
it reflects real money down on the table and not advisory opinion where many of those polled
may have no 'skin in the game'. $CPCE Dailyhttp://stockcharts.com/h-sc/ui?s=%24CPCE&p=D&yr=5&mn=0&dy=0&id=p62224920975

I use the put / call as an inverse indicator which becomes interesting at extreme levels. The current
chart shows a recent very sharp rise in the put / call ratio as players have become rapidly more
bearish on the outlook for stocks based on the 30 day m/a. I classify the stock market as oversold
when the 30 day p / c ratio rises above .70. This measure may obviously go higher particularly if
the market weakens in the short run, but note that a .70 plus has often signified that a positve
price reversal lies not too far ahead.

Saturday, August 08, 2015

Stock Market

The Fed began to tighten policy last autumn with the close out of QE 3. Now, there is intense
speculation the Fed will begin the next step in the tightening process with an initial increase to
short rates as soon as its Sep. meeting. The Fed is promising that once it begins the process of
raising rates, It will do so in a gradual fashion. Since all players know It is likely to raise rates a
couple of times at the least, investors are assessing how even a gradual and gentle process will
affect not just the economy but their rate of return assumptions as well. So, there are questions,
and when there are, it is normal to expect some trepidation in the market until one can get a
fuller sense of how the Fed is planning to proceed with the process. The market has been on the
flat side this year with intermittent quiet bouts of profit taking along with short and rather shallow
rallies. The market has been discounting the event of a change to a further tightening of policy
and I sure do not know whether the discounting process is just winding up or whether it will
proceed further until the event is at last upon us. Assurances from the Fed that short rates are
likely to remain low for a good while may have a countering force in the elevated p/e ratio
which has given little ground since earlier in the year.

Daily SPX

Thursday, July 30, 2015

Commodities Market

Statistically, the CRB Commodities Index is dirt cheap on an historical basis. The index is now
just slightly north of 200. Since the early 1970s, 180 - 200 on the index has marked the bottoms
on the chart. Years back, I developed a macro model to figure out an equilibrium price where
supply and demand for commodities are in reasonable balance and where  the price includes
enough  profit margin sufficient to encourage future supply to grow along with demand. Here in
2015 the fair value price is running around 350 on the index. $CRB Chart

the CRB is trading at a large discount to fair value. This suggests a goodly number of raw
commodities producers are now running in the red and can only be cash flow positive if
there are sizable depreciation and depletion allowances and / or paid - in subsidies to keep
people employed (a not uncommon practice in foreign economies). Big discounts to fair
value in the commodities markets usually occur during recession periods such as in late 2001
and 2008 - 09. Now, we have a different situation. Global demand is growing at about half
the rate it needs to grow to allow depressed operating rates to rise enough to equilibrate the
markets. The 2002 - 2008 boom in commodities prices brought along with it a large cycle of
commodities capacity expansion. Moreover, with global monetary policy accomodative
since 2009, producers have been reluctant to shut - in capacity. The problem of excess capacity
relative to demand has been clearly apparent since early 2012. On top of too much capacity in
the business, we have to add the unwinding of long positions built up in commodities by both
financial players and speculators. Long futures positions in the markets often reached 3 times
what they were at the beginning of the last boom in 2002.

Viewed over the last 40 odd years, the CRB index is sold out and in distress given rising
operating costs and notwithstanding large productivity gains. The timing of price recovery
for commodities, as cheap as they are, is hard to figure. More of the marginal producers
and more of the diehard speculators may have to be stripped out of the equation. The low
global demand growth has yet to show much acceleration and a strong US $ is also a drag
on the market. Thus, a decline in the CRB index down to the 180 level cannot be ruled before
there is improvement.

Commodities are on my watch list and I may try long positions in the DBC commodities
tracking ETF (bottom panel of chart above) when it looks like a short run uptrend may be

Sunday, July 26, 2015

Oil Price

Oil is about to move into a seasonally strong period which normally lasts through the end of
Sep. - beginning of Oct. Such periods can be exciting but do not normally top the Mar. - Apr.
interval for lift off power. The onset of a seasonally strong period does not look like a happy
moment on the chart. WTIC Weekly

The oil price held up very well through the normally weak late spring - early summer period,
but has broken down sharply since. The Iran nuke deal has been a negative, as has a bit of
firming in the US rig count, fresh debate over the prospective size of the of excess capacity at
the wellhead, and a general decline in commodities. The bear market in oil was re-affirmed
when the price recently failed to break above  its 40 wk. m/a. An oversold condition is
developing with important shorter term support at $45 WTIC.

I had been guessing back in the spring that oil could, after the oncoming bout of seasonal weak-
ness, rise to $70 bl. in the early autumn of this year, but that now looks like quite a stretch and
would likely require not yet apparent extra factors to come into play beyond the seasonal lift.

Sunday, July 19, 2015

SPX -- Weekly

The SPX bounced nicely last week to close very slightly below its all time high. Moreover, it
remained clear of the 40 wk. m/a on the plus side. SPX Weekly

The cyclical bull market has grown more tenuous, however. The SPX is no longer following a
clear uptrend line and has steadily lost momentum. It has been making new highs, but they
have been so minor that the market has basically been adrift. Moreover, the breadth of the market,
measured by the percentage of stocks in clear positive momentum price patterns, is sharply
lower than at the start of the year.

The SPX is not not materially overbought against its 40 wk. m/a and has not been so for months.
the 40 wk is also still progressing higher, although it is starting to flatten out compared to the
prior year.

In all, the chart is unimpressive but is not yet near negative, and on the old saw that one should
never sell a dull market, players have just been going along with it even though the SPX has
been drifting.

On balance, the fundamentals are positive, but the situation on this score is tenuous as well.
Broadly, resources are in place to support continuation of real progress in the economy through
2016 in my view, but the progress we are witnessing is quite modest. Measured yr/ yr my
coincident economic indicator has declined from a healthy 3% at the outset of 2015 to an
anemic  1.6% through June. My monthly and weekly leading economic indicators signal a pick up
in growth for  Half 2 '15, but the readings are, shall we say, unprepossessing. SPX net per share
continues to trail the prior year, with weakness in the energy sector more than offsetting gains
elsewhere. Even excluding oil and gas, pricing power is modest, and many companies are
experiencing lower productivity growth since business is now geared for faster volume gains
which have yet to materialize.

There is an investor patience factor at work here as well. The market p/e ratio is elevated.
But with cash yielding near zero and bond market yields drifting higher, many players appear
reconciled for now to hold  equities portfolios to pick up the 2.1% yield and to play the
share buyback and merger lotteries as well as chase positive earnings surprise (viz. Netflix
and Google shares).


Thursday, July 16, 2015

Gold Price

The gold price appeared to have a broken a down trend running back to 2012 earlier this year.
The Jan. rally was better than I expected, but it was unable to hold.  Gold Price Daily

As the year has progressed, gold has been unable to rally from $1200 oz. support as it did
at the outset of 2015, and support at $1200 has recently turned into resistance. I reckon that
at around $1145, gold is now trading a little below the all-in cost of production for a fair
portion of the mining group with any number of mines now cash flow positive only because
of depreciation / depletion considerations. The gold price is now mildly oversold and a minor
bounce may be in the cards.

Global industrial output has been growing only at around 2% in recent years and this has
not been fast enough to put any real substantial upward pressure on factory operating rates.
Consequently, global inflation pressure has trended down to modest levels. Moreover, the
recent blowout of the oil price reflecting a supply glut has been a sore spot for gold players,
since in modern times, strong run-ups in the price of oil have tended to be a very substantial
factor in leading periods of accelerating inflation.

I have been looking for faster economic growth over the second half of 2015 and have thought
this might trigger some positive price action in the gold market. However, global liquidity
growth going into Half 2 '15 has continued restrained especially in the US and China, and the
economic benefits to both countries have been more muted so far than I expected. Thus, for the
present, global output continues to grow but not yet fast enough to signal that capacity
utilization is about to swing higher on a cyclical basis.

The gold price is volatile enough that you do not have to catch the bottom tick to make good
money on the long side. Faster industrial output growth should trigger a decent gold rally, but
you have to hover over the output data as it comes in because the liquidity support for the
global economy is restrained enough that you cannot be sure yet whether the pop in global
output will come soon.

Friday, July 10, 2015

Iran & Nukes

It is high time the US wraps up the talks with the Iran on the latter's nuclear development program.
Iran gets the lion's share of media attention in the propaganda wars with all the "Death to America"
talk. What is less well known is the existence of deep set contempt for Iran here. So, if the
US closes out the talks with Iran without an agreement, there may be some nasty politicizing
here, but it will pass soon enough. Obama has only 18 months left to his term, and in my opinon
he can better spend that time on other matters if the US does not get the strong deal it needs
from Iran right quick. I bring this matter up because I think the political goodwill that has allowed
these talks to continue under the radar for many months is about to run out, thus creating some
concession pressure in Iran's favor that will be received very poorly in the US and could damage
Obama's standing if goodies to Iran creep into an agreement.

With an agreement on the Iran nuclear program and an early end to sanctions, it is estimated
that Iran could ramp up oil production to 1 million bd within one year after the sanction
covering oil is lifted. In a world with excess oil supply at present, that is worth noting as such a
development may not be fully discounted in the market. If there is no deal, Lord knows
what will happen to Iranian output as it is very difficult to say what the standing of the
sanctions program will look like given the number of parties represented at the talks as well
as those hovering close on the sidelines.

Thursday, July 09, 2015


My primary fundamentals are all trending negative, save for short term interest rates. On the
wise premise that you should not signal "buy" or "sell" until the indicators say so, the "easy
money" buy signal, as frayed as it is, still does not signal it is time to significantly reduce
equity exposure. Though there is no "sell" in place, market risk is elevated because history
shows the SPX does not perform well during periods following the the termination of very
large bouts of quantitative easing such as occurred this past autumn.

My secondary indicators are, on balance, positive. For openers, there is excess liquidity in the
system relative to the current needs of the real economy, which now features modest real growth
and minimal inflation. As well, there is a steep positive slope to the yield curve (30 yr Treas. % -
3mo. Bill Yield). This shows no real pressure on the economy from the Fed. In like manner,
short term rates are way below my measure of economic momentum measured yr/yr. Too, my
business profits leading indicators have turned modestly positve in recent months. Finally, the
price of oil is not in a rapid uptrend, which can destabilize the economy.

More broadly, there is still slack in the US economy and no danger of immediate overheating.
In my mind, that leaves the odds favorable for a another cyclical up leg for this market, with
timing of origination far from clear as the market may have to get past increases to short rates

The momentum of the SPX since last autumn when QE 3 ended has fizzled out.  SPX Daily
The SPX has actually entered a short term corrective phase and is mildly oversold against its
25 day m/a. As well, it is sitting on its 200 day m/a which itself is flattening. The key short run
RSI and MACD indicators are also down trending, and the VIX volatility (fear) index is
approaching a short term oversold. There is not a classical sharp short term oversold in place
now, but the market is approaching it. The SPX has drifted off the uptrend lines in place
dating back to late 2011, and is now still nearly 3% above linear support at 2000. Not Quite
out of the woods yet.

Monday, July 06, 2015

Sweet Jesus : Greece And China

The ECB, as lender of last resort, opted today to continue its emergency liquidity assistance to
to the beleagured Hellenic Republic to support minimal commerce. With a "no" vote on pro -
austerity bailout programs from the 'Troika' by Greek citizens, The Greek PM deftly outflanked
Teutonic rectitude and forced the EZ players to either blow off Greece and put the country much
further along toward formal default on its $540 billion debt or to sit down with Greek negotiators
to hammer out a new deal which would swap some level of debt forgiveness for additional
austerity. The Greek people are strongly behind the Tsiparis regime, and major non- euro
power centers will not take kindly to seeing the disintegration of Greek society. If Mrs. Merkel
and the eurocrats in Brussels cannot conjure up a marketable story that Greece is truly a unique
case in desperate need of loan forgiveness and beneficence, they are truly worthless as politicians.
Merkel is inviting a veritable shit storm of criticism from both official sources and social media
if  she cuts Greece loose in its time of need. If the European Union wishes to dump Greece
forthwith, load the Greek wagon with debt forgiveness and sufficient liquidity to help them have
a fighting chance to begin to restore their economy. Germany has a chance to create a decent 'final
solution' this time out.

Party officials are in panic mode to prop up the Shanghai as it crashes. I have no idea whether
they will succeed, but since so many retail investors have been sucked in by the recent run -
up in the market, they must be concerned that social unrest could be out ahead and that what's
left of the more conservative old guard could drum up support for a counterstrike against
leadership that is seen as moving too quickly to alter the economic order.

My view for months has been the Shanghai should trade around 2800, and it is quite something
to my tired eyes to see the Gov. in there trying to hold the market up at such an overpriced level.
Daily Shanghai  (Note, however, that a short term oversold has developed).

Tuesday, June 30, 2015

SPX -- Monthly

The argument here since last autumn has been that the end of the huge Fed QE 3 tailwind to
the economy  and the stock market would involve  penalties for both. So far, resulting economic
and market difficulties have not been major. The US economy slowed down as expected, and
deceleration of progress was made worse by severe winter weather and labor difficulty work
stoppages. With the Fed having frozen its balance sheet, financial system monetary liquidity  
growth is slowing markedly,  and the economy is becoming far more reliant on internally
generated cash flows and private sector credit growth to fund further progress. Transitions of
this sort have occurred frequently and successfully throughout US history but they can be very
difficult during those times when the economy and confidence have been heavily dependent on
large liquidity support. In turn, the SPX has lost its positive momentum and is trading on a par
with its highs seen last Nov.

My weekly leading economic indicators have recovered and suggest a mild rebound for the
economy during the second half of 2015. When measured yr/yr, business sales and earnings
should also improve modestly. As for the stock market, my "easy money buy signal", in
force since very early 2009, will likely end late in 2015 if the Fed starts to raise short term
rates as is now widely expected.

Speaking as a funds manager and not a retiree, when the "easy money buy" comes to an end,
it would be time for me to acknowledge increased cyclical fundamental risk and reduce exposure
to stocks.

No buy signal does not imply a market top but it does say to me that it is time to
activate strategy and tactics to reduce exposure to stocks because the secondary indicators I
use during these periods are far less reliable than the primary ones and because fundamental
risk will likely rise further. I should note that a goodly number of fund managers would not
agree with this approach, finding it too conservative.

I have added a link for the SPX Monthly Chart. It shows the SPX to be down on its 10 month
m/a, RSI and price momentum in downtrends, and most disquieting, a roll over to the down-
side for MACD. It may be too early to consider that roll - down in MACD a kiss of death.
The reason is that  the economic expansion does not yet exhibit the maturity in terms of
resource and capital utilization that would prompt such a perspective.

Wednesday, June 24, 2015

More On China Stocks -- Shanghai

First up, let's look at the monthly Shanghai for the longer run dating back to the mid - 1990s.
Shanghai Composite

In 1995, the Shanghai was in the area of 700. If you figure a 10% annual compound return, that
works out to about 4700 currently, which is just where the Shanghai is sitting. The issue here is that
China is no longer logging 10% growth and is struggling to achieve 7% annual growth. With a
forward look, the base at 4700 is too high for an economy with a pronounced decelerating growth
trend. The index has a large component of pure speculative interest.

Note also that the monthly RSI shows an overbought reading nearly right up there with the
bubble top of 2007. Now since China's book profits have grown significantly since then, the
p/e ratio on the market is considerably lower now than back during the bubble top, but even
so, this is not a cheap market as it was in mid - 2014 at the 2000 level. Note also that the very
high RSI readings up near 80 or above since the mid - '90s have served as good warning lights.

Now comes the weekly chart for the Shanghai. $SSEC The top panel of the chart compares the
Shanghai with the S&P SPDR index ETF for China. There is not a long history here, but the
$SSEC has tended to top out in relative strength against the GXC in the 50 - 55 area (the last
time was 2007).

China has a long history of domestic turmoil and is the graveyard of prognosticators. Apropos,
the US State Dep't and the CIA keep their fingers crossed for stability and hope for the best.
Now, with Mr. Xi trying to shift gears on economic and financial policy, China is going into one
of those times when its "social contract" -- its citizens tolerate  the the Party in exchange for
continuing prosperity -- may be tested for one of the few times in the past 35 years.

Saturday, June 20, 2015

China Stock Market

I made a nice call on China stocks in Jun. 2014. The key premise was that a slowing economy
would lead the PBOC to ease monetary policy and re-liquify the system. I believe that longer
term, the Chinese have preferred to invest and speculate in real estate, and that the destruction
of the China stock bubble going into the 2008 - 2009 global recession only served to reinforce
the preference for real property. The weakness in the residential real estate market over the
past year was partly a result of tougher policy by official China in the real estate area, so when
China began to ease monetary policy in late 2014 and encourage equity investment, the change
in policies left real estate to languish and invited speculative spirits back into equities. This
was a pleasant surprise for the equity market since monetary policy has not been strongly
accomodative at all by China standards. So, net - net, mild easing plus changes in official policy
has lead to a windfall for stock players. GXC (With The Shanghai in the top panel).

It is interesting that the PBOC's change to ease has been moderate and controlled, for it is
likely not strong enough to trigger heavy speculative lending to business and real estate as
seen in the past. In this regard, since the new easier money policy has been slow to roll out,
improvement in China economic performance has been deferred until Half 2, 2015.

Over the years I have mentioned  that when The Shanghai is strong, the action can get wild
and undisciplined. The chart above, which features the S&P ETF of a broad index of investment
grade equities (GXC), looks tame in performance compared to the wild and wooly Shanghai
shown in the top panel of the chart. With the GXC there has been a  major tradeoff of volatility for
positive return against the Shanghai in a strongly positve market environment.

The GXC has been in bull mode since late 2011 and its pattern more resembles the SPX than the
Shanghai. The recent jump in price to $100 for the GXC brought it closer to its all - time high
of 113 set in the bubble high of late 2007. The stock has been correcting, but it remains mildly
extended and overbought. Earnings have progressed over the last seven years, so the stock is
much cheaper than it was at the peak in 2007.

It is good that China has embarked on controlled money and credit easing, and that from a
policy point of view, it is trying to encourage a larger, more liquid equities market. China has
also curbed its mercantilist impulse and seeks to diversify its economy away from excessive
emphasis on industrial development. I am hopeful that with slower growth the populace
can adjust its expectations calmly and will not require the authorities in Beijing to sop up
anger with nationalism and a round of regional imperialism.

Thursday, June 18, 2015

SPX -- Daily

It was mentioned in a 6/10 post on the SPX that since the market held the shorter term shelf
of support at 2080, it might be worthwhile to see how it performed given widespread bearish
sentiment on both technical and fundamental grounds. The SPX has rallied enough off of
2080 support to turn the 25 day m/a positive, so it continues to require added attention given
the surprise move relative to sentiment. SPX

Key indicators of SPX behavior continue to show decelerating price momentum and recent
rallies that have tended to sputter out in mildly fitful fashion. Many strategists and other close
observers believe it is high time for a healthy correction. May be so, but it is also clear that
there exists a steadfast cadre of players who argue that the economy is progressing, that
weakness in SPX net per share is but temporary, and that a premium p/e ratio is well warranted
given prospects for a continuation of an extended period of low inflation and interest rates.
Newer players to the game may not be aware of the sway that this thesis of support for higher
and rising p/e ratios held in the market of the 1960s and very early 1970s. The view is often
encapsulated by the "Rule of 20", which claims that SPX p/e = 20 - the 12 month inflation
rate. With inflation very low and interests rates non - threatening, players who support this
idea see the market as reasonably priced.

I have issues with the "Rule of 20". Mostly, I am concerned that the rule should be based on
a longer view of inflation potential where there is considerably more room for debate than with
short run inflation measures.

Just know now that the "Rule of 20" is in vogue currently and has yet to be defeated by the
facts on the ground.

Sunday, June 14, 2015

US Monetary Policy

Short Term Interest Rates
The classical cyclical economic case for raising short rates has weakened since latter 2014
with a more sluggish economy and awaits a return to stronger economic growth. Market rates
at the very short end of the curve are near record lows and support the Fed's ZIRP. With the
economy in its sixth year of recovery, capital slack in the system has been greatly reduced,
but there are presently no compelling imbalances in  resource utilization. The Fed has time
to watch for an improved economy before taking action.

Fed Generated Liquidity
The tapering and close out processes for QE 3 have adversely affected economic growth
and stock market progress in 2015. Since the Fed has not acknowledged these developments,
it is hard to say how aware policymakers are of the connection. I suspect it has been discussed
within the Fed and has made a few members of the FOMC more cautious about raising rates.

 The Fed has let over $35 bil. of assets run off Its books in recent months. This may have
bothered Treasury and stock market players some, and the Fed may allow some further modest
run - off. However, since seasonal system liquidity needs will firm up after the summer, it
may well be that the Fed will add back as much as $50 bil. to its book by this autumn. If so,
the markets may like that.

Wednesday, June 10, 2015

SPX -- Daily

The SPX rallied sharply today off 2080 shorter term resistance. Since so many players have
recently been looking for a price correction of substance, it might be wise to see how this
bounce plays out over the next few days. SPX

The key to extending the pop in the SPX is whether the market can break above the 25 day
m/a followed by enough forward power to turn the "25" higher. Such action would no doubt
change a few minds among the consensus that the market should erode further to test
support at the Mar. low of SPX 2040.

Note however, that the rallies so far this year have been losing momentum.

Friday, June 05, 2015

Long Treasury Bond

I turned bearish on the long -T around mid - Feb. of this year largely on technical grounds.
The TLT was above 130 at the time and very overbought. It is now at about 117.5 and the
overbought has vanished. TLT

The fundamentals I use to get a good sense of direction for the bond market have eroded only
slightly and current data are insufficient to signal a clear bearish reversal. I conclude that not
only was the market overbought earlier in the year, but that weakness in TLT likely also
reflects expectations that future inflation will strengthen and that the Fed has it strongly in
mind to raise benchmark short term interest rates over the next six to nine months. The sharp
weakness in the TLT price seen since Feb. of 2015 may also involve trader worry over liquidity
in the market once it becomes more apparent the Fed is finally getting ready to pull the trigger
on rates.

From mid - 2012 through late 2013, TLT fell in price from above 120 down to the 97 - 98
area all on expectations that the Fed would end QE 3 and raise short rates. Bond pricing
fundamentals remained positive over this entire period, and when traders realized their fears
were not going to be realized, they took the bond up from the high 90s to above 135 early
this year. The moral here is that we need to say a sustainable step in economic growth
with enough momentum to bring additional pricing pressure and firmer credit demand before
it can be stated with confidence that T - bond price fundamentals have made a decisive
cyclical turn for the worse.