Commodities Market -- Short Term Failure

After an extended sell down running from Apr. '11 through Jun. of this year, the commodities
market experienced a sharp rebound until just recently on the wings of speculation that major
central banks were prepared to engage in a new round of easing (which they subsequently did).

During the last sharp downward break this year, the CRB index did fall through very long term
support at the 290 level on its way to 270. That was not a good sign, but it left the market deeply
enough oversold to entice players (including yours truly) to come in on the long side. The
recent rally from the early summer lows was a strong 18.5%. However, the CRB did fail to
take out resistance at the 320 level. CRB Chart That is a disappointment on technical grounds
and, for me, it was also disappointing fundamentally as my long term value model for the CRB
had the index as reasonably priced at 320. I read the flop at 320 as an expression of trader
concern over whether the newest programs of monetary policy QE will work to restart global
economic growth just ahead.

Although I did sell out my long position of the DBC commodites ETF over Jul. 18 - 19 as posted,
I still have an interest in this market from the long side. We do have the QE programs in play, and
the chart does show a clear positive break above the downtrend in the CRB from Apr. of last
year. However, and this is not shown on the chart, the recent interim high in the CRB of 320 does
fall on a longer term downtrend line running from the Jul. 2008 blow off top near 475. The
fail of the CRB to take out long term trend resistance at 320 adds heavier weight to that level and
increases the gravity of betting against the longer term direction of this market especially since
the 2011 - 12 price correction took out cyclical trend support.

Fundamentally, the largely downward price action of the CRB since Apr. 2011 not only reflects
the loss of global economic growth momentum since then, but it also suggests the overall
situation of global commodities supply / demand may be more balanced in terms of supply growth
than I have expected.

For now, I am content to see if a substantial oversold condition develops for the CRB before
dusting off looking for a long side commodities ETF to play.

Stock Market -- Weekly

Fundamentals
My weekly cyclical fundamental indicator (WCFI) fell slightly last week, but remains in a mild uptrend. The SPX has outpaced the WCFI by a significant margin since the early Jun. start to
the recent rally. Despite the new QE program, Fed Bank Credit remains in a firm downtrend.
This downtrend is widely expected to reverse shortly with the fresh QE and it is anticipation
of that event which has been the primary support for the rally. With very short term fundamentals
 unimpressive, the rally in the market remains "on the come" fundamentally.

Technical
The weekly SPX shows a well established up move in the market with confirmation from the
indicators. The market is moving into overbought territory, but there is no "bell ringer" signal
as yet that profits need to be booked. SPX Chart

QE 3 In The 11th Hour....

If QE 3 is to buttress the economic expansion, it has come at a late hour, a few new
economic data points show. First, initial unemployment claims is a good weekly
leading indicator for the economy. The trend of improvement has clearly stalled out:
IUIC weekly chart. Claims are running 382K a week and to support a continuation of
the recent advance in stocks, claims are going to have to drop to and sustain the 360K
level in the months ahead.

Markit's PMI flash report for Sept. manufacturing shows the sector is bumping along at
minimally positive levels. Markit Flash Mfg. Scroll to page 2 and you will see a bright
spot, namely a slight increase in new orders for Sept. An acceleration of the rise in new
orders would be a positive for the stock market as well as for the economy.

Oil Price

Reflecting seasonal supply / demand patterns, the oil price normally experiences strong
postive price action in the late winter / early spring and from the end of Jul. through the
end of Sept. Weak periods run from late Apr. through late Jul. and from Oct. through the
end of Feb. in the succeeding year.

The oil price did have a nice seasonal run up this summer, and as we approach the month
of October, when seasonal weakness normally develops, the market has started to sell down
after reaching a notable short term overbought. $WTIC chart

The sell off in the oil price this week, although abrupt, is certainly not beyond the pale of
normal seasonal activity. Despite evidence of decelerating global economic and trade growth
this year, the oil price managed a strong, postive, seasonal run this past summer, no doubt
heightened by pressure that  Israeli PM "Bibi" Netanyahu has been applying to the Obama
administration over progress Iran is allegedly making in developing weapons grade nuclear
material. The warm Romney / Ryan embrace of "Bibi" and the Likud group may have
encouraged traders as well. But, the "bomb Iran" story has again quieted down, and the
Mittster has been gaffing his way down in the polls. In addition, the rumor mill now has it
that the Saudis could step up output to calm the market.

For now then, I am simply going on the assumption that the oil price may be headed for further
and perfectly normal seasonal weakness that could run for several months. A lower oil price
would facilitate the efficacy of the recent monetary easing actions of major central banks. It
might be the case that the 2008 - 09 collapse of WTI crude from $145 bl. down to $30 has
proven instructive to OPEC, but you cannot count on this. Note also that the normal month for
traders to have bombers on the tarmac to go and take out Iran's nuclear facilities is Feb. when
oil makes its usual annual seasonal low, but do not be shocked if "Bibi" makes a final push
to kite the oil price ahead of the US election in Nov.

The $80 - 100 bl. price range depicted on the chart represents my longstanding best guess for
the oil price parameters in 2012.

US Business / Profits

US history shows that rare are the times when the economy fails to respond positively to
monetary stimulus. And that is a good thing now, because the economy has lost enough
progress momentum to be concerned. The weekly leading indicators are pointing mildly
and fitfully upward as are the measures of real personal income. But, measured yr/yr,
industrial output growth and real retail sales growth, although positive, are low enough to
warrant pause. Similar can be said for my top down profits indicators such as the $value
of industrial output and the recent PMI reports. Here we see that growth momentum has
slowed to levels consistent with the development of profit margin pressures on top of the
low physical output growth.

The Fed's new QE 3 is substantial enough to support a significant re-acceleration of output
growth as well as an eventual fresh bounce in the "headline" inflation rate. But, the transition
from a sputtering economy to one which progresses smoothly can take a couple of months
depending particularly on consumer and business confidence. (The relative flattening of
production in 2012 suggests companies are already well mindful of maintaining inventory
control.)

The stock market can move up during periods of this sort as long as investors remain
confident that monetary easing will work and even if profits level off for a brief period of
time. The positive bias to the market can also remain in place even if profits begin to lag a
recovery of volume growth because of lingering pressure on margins.

What is not clear is what will happen if business ratchets down further in the interim instead
of just gracefully leveling for a relatively brief period. Such could occur if the economy's
dynamics turn out weaker than the Fed expected and the further monetary easing comes too
late to save the day. There may be just enough forward momentum in the economy to moot
the former case, but rest assured that investors and traders will now be looking for good
news and not the negative news that prompted the Fed to ease. Bad news is no longer
"good news" but plain old bad news instead.

Stock Market -- Daily Chart

The SPX has decisively broken through significant resistance at the 1420 area and has cleared
out a double top formation. The market is moderately overbought in both the short and intermediate
term and is well extended above the trading band which has dominated the rally since early Jun.
So, we may well have a mini - blowoff to a new cyclical high which calls for a little backslide
but which is still likely to test higher ground ahead. The indicators do not suggest anything very
threatening is imminent from a purely technical point of view. SPX Daily Chart

Monetary Policy -- The New Open End QE

The Fed has opted to revert to the script it followed after the economy hit bottom in 1932 during
The Great Depression. This time it has going to provide $40 bil. of mortgage backed securities
purchases a month until further notice. In a weak credit demand environment, the Fed is the primary
provider of liquidity to the financial system. Without this liquidity, the economy could well have
tipped over into a deflationary depression with catastrophic economic consequences. QE is a
strong lifeline for the economy. It is perhaps a necessary condition for continued economic
recovery, but, as we have seen since 2009, it is hardly a sufficient condition for robust economic
growth.

Since late 2008, the Fed has been expanding Fed Bank Credit periodically and primarily within a
$300 bil. band range. The very low end of the range has been hit in 2/2009, 11/2010 and here in
Sep. 2012. "Test" contractions of liquidity have preceded each major new wave of QE. The
contractions have become progressively less destructive to the recovery but have slowed it
down each time out. The Fed has not hesitated to allow liquidity it provides to exceed the top of
its $300 bil. annual range, but subsequently moves to rein it in. With the recent nearly $100
bil. drawdown of its balance sheet, the Fed can buy $40 bil. a month of securities over the next
12 months without overtaxing its silent, internal discipline.

Remember too, that the Fed still has operant currency swap lines with foreign central banks.
Should an offshore crisis precipitate a sudden, large demand for US$, the Fed will stand ready
to supply the $.

In the short run, there is still a risk the Fed waited too long to add fresh liquidity and the
economy could "break bad" on the downside. The Fed gambled with the economy as it did in
the three prior years and there is no assurance It will get away with it this time.

A large open end QE program such as the Fed is initiating does carry another economic risk.
If the labor market continues to respond slowly, QE induced financial speculation in the fuels
and other sectors of the commodities market could force the inflation rate higher, and if
business keeps wages growing very slowly, then real incomes could decline, which would
short circuit much of the benefit to growth that QE might otherwise bring.

Finally, let's assume the Fed keeps its $40 bil. monthly stipend in place over the next full
year or so and that the economy does respond rather favorably. If such were to occur, the
economy would feature considerably lower levels of slack. This development would then
put the US in more advanced expansion mode, when cyclical pressures could lead the
markets to push interest rates higher and the increased level of resource utilization could well
lead to a more normal and broader cyclical acceleration of inflation.

The first step with this new program is to see if the US can muster new confidence to avoid
"breaking bad" in the months just ahead.

Shanghai Stocks -- The Big Round Trip

Despite phenomenal economic growth over the first decade of the new century, the Shanghai
Composite is no higher now than it was over the 2001 - 02 period when the index first topped
the 2000 level. Shanghai Comp. Long Term It has been a classic mercantilist market boom/ bust
which goes on to the resmes of Hu Jintao and Wen Jibao, who, as long term readers of the blog
know, are not two of my favorite political characters. Now the new guys coming along have to
work to build and realize capital. And, word has it, they appear to be MIA currently. Over the
Hu / Wen years the money supply compounded somewhere near 18% annually, far in excess
of what a liberal measure like 10% real economic growth would warrant. Yes, vast sums went
into building physical capital, but real estate development including the famous "ghost cities"
soaked up the bulk of the excess liquidity, with the stock market serving as a speculative
stepping stone to build war chests for the real estate game. There is the obvious question of
whether physical capital and labor can generate the returns needed to service the glittering
new spectacle China has become. Family have recently returned from China armed with
photos of the most spectacular and modern urban settings ever seen.

I have made a little money trading China stocks, but the market has been a side show to the
development which has taken place. Hope the new guys, wherever they may be, do a better
job of building capital markets that befit China's emerging place in the world.

Stock Market Weekly

Fundamentals
The market rally since early June has been paritally confirmed by an ongoing uptrend in my weekly
fundamental indicator (WCFI) which turned up just after mid - Jun. I say "partially confirmed" because the SPX has made a new cyclical high but the WCFI has not as sensitive materials prices have not
kept pace with stocks. The SPX rally has been far sharper than the recovery of the WCFI. There is
nothing in the broader set of economic data to support SPX strength. I conclude there continues to be
speculation of further QE by the Fed. The WCFI points only to rather mildly positve stock market
action ahead.

There are folks who are paid to divine what the Fed may do with monetary policy in the near
future. I have long thought it was kind of dopey to ruminate so hard on what a room full of folks
might conclude about monetary policy. I think it is interesting that despite all the talk about easing,
including Bernanke's comments, the Fed's balance sheet has been shrinking significantly since the
end of Feb. It appears the Fed has been able to paper over a tightening of policy by continually
discussing further easing. The reality of Fed policy says "sell" not "buy", and it could well prove
positively ruinous if the Fed keeps on tightening during an era when they have been prime providers
of liquidity to the US economy. At a minimum, the Fed needs to buy up to $60 bil. of securities
before long even if it chooses not to pursue further QE or violate promises made during QE 2
concerning credit it will extend.

Note, however, that since 2008, the Fed has usually shrunk liquidity for a period before it has
moved into significant add mode.

Technical
The market is in a solid intermediate term uptrend. It is not seriously overbought but the logic of
the move since early Jun. suggests it is getting extended in the very short run.The weekly indicators
support the rise, although some key measures such as MACD kicked in rather late. SPX Weekly
Keep on eye on RSI (top panel) and watch the ADX in the bottom panel. A +DI of 30 (green)
and a -DI of 10 (red) could well signal a tradeworthy overbought.
_____________________________________________________________________________
I note also that the old SP 400 large cap industrials is up around its old all time weekly high in
the 1950 area set in 2000 at the height of the market bubble. This is a rather interesting
development. Industrial's net per share is well above where it was back in 2000 but it trades
more humbly today, sans the bubble p/e ratio. I owe you a chart on this one. Since year's end
1995 and right before the market went into bubble mode, the old SP 400 has compounded at 6.5%
per year before dividend return. Not bad for a risk asset.

Eurozone Status Check

The ECB bond buying program, assuming it is fully activated, will reduce troubled sovereigns'
borrowing costs across the yield curve and strengthens banking and insurance sector balance sheets.
Although it will be fully sterilized on a documentable basis, the program will add liquidity to the EZ financial system via reduced capital outflows and eventually via money multiplier effects within the
banking system. It is not a robust QE program, but it will nudge recovering EZ liquidity along further.
The three year maturity limit on ECB purchases reduces the bank's interest rate risk, but balance
sheet quality will suffer with the purchase of riskier assets. It will have the Fed to backstop it
during critical periods. The program is but one of a long line of steps that will be required to keep
the EZ intact, and the time it took to get the program and the restrictions on QE testify to how
difficult and long the road ahead toward refurbishment of the EZ will be.

There was further erosion of the EZ economy in Aug., and with liquidity and confidence in the
system low, this should come as no surprise.

The Euro 350 iShares index has been rebounding and is up toward important resistance just as
the Euro market is getting overbought short term. As of today, the market remains in a post
cyclical bear event trading range, which highlights the importance of testing resistance ahead.
IEV 350 Chart

Markets players in the US are growing more weary and discouraged by the glacial pace of
reform in the EU / EZ. I still remain hopeful that more progress can be made although there is
no light at the end of the tunnel yet.

Post Labor Day Update

US Economy
From mid - 2010 through mid - 2011, the yr/yr change in the real wage went from +2% down to
-2%. In line for the same period, real retail sales went from +8% down to about +3%. By the
middle of 2012, lower inflation allowed the real wage to recover to modest positive territory,
and improving yr/yr real wage momentum does support a better retail sales outlook as we move
into fall, as does the yr/yr % change in employment which has also accelerated since mid -2011.
But, improvement in consumer purchasing power has been modest, as businesses continue to
trade on a weak labor market with pitiably low wage increases. Thus the potential for the main
engine of the economy although positive has been heavily compromised. Construction spending, an
area with powerful recovery leverage, has been doing moderately better, but its contribution
has been partially offset by a flattening of export sales with the latter reflecting a stronger US $
and far more modest global demand.

Monetary Policy
The Fed has been winding up to pitch another QE fastball, but that is all that It has been doing.
The continued official talk of "more easing as needed" has kept the risk markets afloat, but it
has also not done the economy any favors since QE talky talk has led to speculation in the
oil market, which eventually harms real incomes via higher fuel prices. By delay in the short
run, the Fed has been undercutting the eventual economic benefits of QE.

Stock Market
The boyz have yet to sell the evident double top in place with any urgency, as players do not
want to miss a QE program that could be large enough to trigger a sharp upleg. Patience was
tried today on a worse than expected PMI mfg. report and downward price pressure left the
market at a "roll over" point SPX Daily Chart If you are long the market on a QE speculation,
you will have to continue to gut it out as the ECB and the Fed should be heard from over the
next six trading days.

A Monetary Moment -- Possible Gamesmanship From Cousin Benny

As the debate about whether the Fed is likely to start a QE 3 program and when rolls on, I
note that the US is witnessing a strong period of quantitative tightening which has been underway
since Feb. 2012. Specifically, the Fed has allowed a bit over $100 bil. to roll off its Bank Credit
balance. That represents a strong 3.5% tightening move and brings Fed Bank Credit about $50
bil. brlow where it was at the end of QE 2 (6/30/11). This is the fourth round of liquidity
tightening in evidence since the end of 2008. Each one of these tightening moves has been
followed by a sizable easing move. The Fed needs to buy $50 bil. of Treasuries or other paper
to raise its account value to the level it promised to maintain at the end of QE 2. Moreover, if,
and this remains a big if, the EZ's central banks may need $ over the next several months, the
Fed through its currency swap line could lend up to $200 bil. more without raising eyebrows.

So, there is the potential for QE without the Fed actually having to say They are providing it.
Just a little something to keep in mind.

Eurozone Status Check

Amidst a battle with the Goths of the Bundesbank over sovereign paper purchases, ECB head
Draghi has passed on Jackson Hole to fade into theEuro haze for another week or so. The guy has
succeeded in pulling enough levers to Get the EZ's liquidity deficit moved from critical on to
serious and may not be far from restoring liquidity to a level that reduces the risk of a deflationary
downturn.

The EZ remains mired in recession and lower growth outside the zone is crimping export orders
as global trade slows to a crawl. Debt levels are shrinking on weaker demand and on forced
bank recapitalizations.The ECB must contend not only with the German monetary authorities but
with occasional bouts of capital flight. In reality the EZ has held up far better than most, myself
included, would have thought. But there are tight limits, both economic and social. Seven years of
fat has been followed by four of lean. Three more lean years is likely to prove unmanagable.

After a fast, sharp bear market from spring 2011 into the fall, Euro stocks have been trying to
establish a base in anticipation of eventual economic recovery with action and volatility heavily
reflecting perceived potential for both ECB and Fed monetary easing. Euro 350 IEV Chart Ditto
the Euro ($XEU). The IEV is getting overbought.

Further monetary easing by the ECB through bond purchases and other schemes it might try for
is just the first step for EZ recovery. The authorities will also have to lighten up on bank
recapitilization plans and plan for stimulus to avoid or cope with oncoming humanitarian issues.
A number of countries in the EZ have been pissing regularly into the well and its foundations
are rapidly corroding.

There is much more to say about the eventual geopolitical / economic status of Europe, but I'll
hold off for now as I need to figure more out concerning the US vs Germany and how to say it
politely.

Stock Market -- Weekly

Fundamentals
My weekly cyclical fundamental indicator (WCFI) continues to trend up from an interim low set around
mid-Jun. The coincident economic measure remains positve and the forward looking components
are stronger primarily reflecting lower unemployment insurance claims and a moderate recovery
of sensitive materials prices. Year-to-date, the WCFI is up 5.6% compared to 12.2% for the SPX.
A small amount of the differential in returns likely is a result of investor preference for larger cap.
issues, but the bulk of it reflects the expectation by players of some form of additional QE by the
Fed or ECB or both. Interestingly, the Fed has not announced any QE in the current economic upleg
while the WCFI was rising.

The upcoming monetary policy symposium at Jackson Hole, WY near the end of this week should
really be the ECB's show since it is the EZ which is in the more serious economic situation near
term. It is within the Eurozone where a big QE program is most critical. Naturally, investors will
listen intently to Bernanke's talk for more clarification about US QE as well. Do not discount
a significant Fed pledge to provide a sizable currency swap arrangement if it fits into the ECB's
plans as that is an "under the radar " form of QE. ECB leader Draghi needs to remember a key
rule of political economics this week, to whit: "Money talks and bullshit walks." Substantive
ECB policy action is overdue.

Technical
The SPX remains in an uptrend and that trend is supported by the primary weekly chart indicators.
SPX Weekly Chart The chart also shows the double top in place and suggests that there are only a
couple of weeks remaining in which the uptrend can successfully take out the resistance before it
exhausts itself anyway. With so many voices coming from the EZ, this week could be a bumpy one.
Ditto a Bernanke fumble.
______________________________________________________________________________
The Fed does not operate this way, but now that Romney has indicated he plans to lift Bernanke's
chairman title if elected, the Fed has to be at least fantasizing having Ben announce that, indeed,
more QE may be coming soon as a counter to Mitt's casual effrontery....

Bugz Bernanke Boogie Into Gold

Well, there were technicians who said only to buy gold if it could show some moxie clearing
resistance at $1620 oz., and they have been right so far. Bigger players such as Soros, Paulson
and Pimco Commodities are all reportedly thumbs up on the trade. It is all "on the come" ahead
of anticipated fresh QE by the Fed and perhaps a turn by the ECB as well. The recent sharp
run up is ahead of the Bernanke and Draghi speeches at the Jackson Hole, WY Fed confab
late next week. Gold Price Chart:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&b=5&g=0&id=p07801840825

You are on your own on this one.

Stock Market -- Daily Chart

As discussed in the Aug. 17 post (scroll down a little), the SPX did record a secondary or
double top and triggered a mechanical sell signal. SPX Daily Chart The market has registered
a minor pull back so far, but since this was from a short term price momentum overbought, the
action this week so far has been no surprise.

A double top in the SPX as shown in the chart is not to be taken lightly by any means if only
because there are traders who will take profits on such an indication. The broad channel uptrend
in the market has not been violated by a downside break. There has been only a trim from a
short term extended position. The logical move after a failure of the SPX to break out to a new
cyclical high would be to test the base uptrend line which now sits near 1380, especially given
the pronounced saw tooth pattern of the rally since early Jun. I have seen a little work over the
years which would suggest that the market is already flashing a bearish sign even with the
rather modest pull back in evidence just because of the double top formation, but I am not sure
how much to trust it.

Financial System Liquidity & Monetary Policy

QE 2 ended 6/30/11. It did increase liquidity substantially and there was a booster shot from the
Fed's temporary $100 bil. currency swap deal late in 2011. Through Jan. 2012, my broad
measure of financial system liquidity or funding was up 5.6%, close to the 6% level adequate
to fund a moderate economic expansion. Here in Aug., the yr/yr change in the same measure is
only +2.4% and trending downward.

With real estate lending, the major interest earning asset category for banks, flat as a pancake,
the bankning system remains flush with balance sheet liquidity and has been able to finance
private sector credit demand with marginal incremental funding. The US is over three years into
economic recovery and banks still remain significant net buyers of Treasuries!

Because I focus on the banking system and its funding operations, I do not count money market
funds in my financial system liquidity measure. If I did, then the yr/yr % change in total liquidity
would come in well below the 2.4% mentioned above.

The key liquidity category helping the economy stay afloat has been the more narrow measure
of monetary liquidity or cash and checkables. At year end 2011, the yr/yr growth of this
indicator was a powerful 20%. Now, with no new QE by the Fed, the yr/yr growth is down to
9.5% and could fall to 5% by year's end 2012.

Ninety years of monetary and credit data suggest the US has entered a stern trial of whether
there will be adequate funding to support continued economic expansion. I say this because
the recoveries of private sector credit demand and bank funding capacity have been too slow
so far and without a sharper pick up ahead the economy may well be prone to fail if the Fed
continues to stand idly by.

Treasury Bond Market

Longer dated Treasury yields have jumped up sharply since late July. The 10 year yield is now
up right at prior support and the surge is close to breaking the downtrend line in place since Feb.
2011. The cyclical fundamentals I watch most closely to track the Treasury market are either
basing out after a decline or are up slightly since June. In either case, the run up in yields is too
sharp to be supported by the fundamentals. Investment grade corporate bond yields are also now
moving up in sympathy. 10 Year Treas Chart With Industrial Metals Comp. & SPX

Bond market players for now apparently see the odds of further QE by the Fed as rising as we
get closer to the end of Aug. when the Fed holds its big economics / financial markets confab at
venerable Jackson Hole, WY. You can also see this in credit quality spreads which are narrowing
as players are more reluctant to sell out higher yielding, lesser quality paper. And, there is
likely some rotation out of very low yielding Treasuries into equities, where the SPX yields 40
basis point above the ten year and sports an earnings yield of 7.1%. So, this move out of
Treasuries is developing into a strong bet on a substantive QE program that is seen by the bond
guys as likely far more attractive for riskier securities. And, I think at this point, without copious
liquidity largesse in the system, riskier securities such as stocks and commodities would need
heavy continued rotation out of Treasuries to support more sustained advances.

New rounds of QE from the Fed and ECB (Draghi to speak at Jackson Hole) could further
significantly damage the Treasury and premier corporate bond markets if new QE actually is in
the cards for the Sep. '12 and beyond period.

But, let's check short term first as we have both the SPX and TNX yield at critical resistance
levels.

Stock Market -- Daily Chart

A vexing week has ended with an extra vexing close. The SPX, rather than moving up smartly
above closing rersistance, has ended a point below it. SPX Daily Chart So, as of today's close,
there is a clear double or secondary top in place. I flag today's wind up as giving a mechanical
sell signal for very short run players, and next week, some money should come off the table
early on as there will be folks who take this tidy run up only to the resistance line as a failure of
the rally. Since mechanical trade signals of this sort are very far from invincible, and since
the market is mildy overbought short term on price momentum, players who remain bullish on this
recent rallly may have to continue to sweat it out.

Stocks -- Confidence Veering Toward Complacency

The market is mildly overbought in the short run on the measures I use most often, but a couple
of indicators raise an eyebrow. Specifically, the 21 day m/a of the $TRINQ, which measures
net buying or selling pressure, is moving into overbought territory, while the $VIX or volatility
index has moved down near lows for this cyclical bull. So you have stronger buying pressure
as fear has progressively diminished. Before you check the chart, remember that when the
$TRINQ is below 1.00, there is net buying pressure in terms of positive breadth and the up -
volume behind it. $TRINQ Chart (NASDAQ Comp. is in the top panel.)

Stock Market Weekly

Weekly Chart
Belatedly, My SPX weekly chart confirmed the recent rally this week, with positive turns in
MACD and price momentum as well as a continued uptrend in RSI. SPX Weekly Chart My
proprietary 40 wk. price oscillator -- which I use to gauge how much capital to play with in
the market -- also turned positive, again belatedly. I think I mentioned several weeks back that
the recent rally, light on weekly price momentum, would bring me late to the party, and so it has.

Back on Apr. 5, I posted that the weekly chart suggested a 3 -6 month overbought for the SPX
based on a large premium it had to the 40 wk. m/a. Well, the market is little changed from the
early Apr. reading and the overbought is no longer glaring as the 40 wk has moved up under
the SPX. As discussed last month I made decent money trading deep oversolds in oil and the
broader commodites market, but I regret not playing the current rally. For equities, the experience
proved (again) that very successful disciplines do not always work.

For now, I plan to watch how the SPX handles resistance in the 1400 - 1430 range especially
since my primary gauge does whipsaw from time to time.

Fundamentals
The SPX is up about 11.8% for the year so far. My weekly cyclical fundamental indicator is
up but 5.4% on the year. I can make a case for a higher p/e ratio for the market based on
reduced inflation pressure and a still positive earnings trend, but I suspect investors have
lifted the SPX return over the short run fundamentals primarily to include the expectation that
further monetary easing may be at hand either by the Fed or the ECB or both. The premise
here is that a continued global slowdown of economic growth is really "good news" in that
 it moves the world closer to the day of new QE programs.

There can be many a slip between the cup and the lip. As a guy who is well into my "golden"
years, I have come to appreciate the sagacity of that old admonition and leave the field of
future policy speculation to the younger and more daring.

Stock Market -- Daily Chart

The Stock Market remains in a confirmed short term uptrend. Breadth and momentum are ok, but
volume has turned light again. The SPX is at enough of a premium to the 25 day m/a that you
should not be surprised if the market is clipped a little around the edges by the real short termers.
There is a mild / moderate but by no means serious overbought to contend with now.

The next step for the advance is to get through the 1400 - 1430 area on the SPX. Resistance over
the next couple of weeks could be a very important issue since it would raise the possibility of
a bearish secondary top in the wake of the original cyclical top of SPX 1419 set on 4/2/12.
However, since resistance at or mildly above 1400 would be a more or less natural development,
long side players may have to sweat it out for the short run, keeping an eye on breadth which
has been a price level leader in the current rally.

SPX Daily Chart

Stock Market -- Longer Term Technical

The downward break in the market this past spring was not deep enough to wreck the cyclical
uptrend off the Mar. 2009 low. By the same token, the advance of the SPX will again be suspect
if it does not clear the Mar. 2011 approx. 1420 prior cyclical high in decisive fashion over the
next couple of months and if it does not close out 2012 around the 1500 level. From a technical
perspective, you need to keep the market on a tight leash now because we have already seen
three distinct upwaves off that Mar. '09 low and we are now in a possible "bonus" situation
where there could be extra upside which would force a revised "wave count" should the market
continue to trend higher.

The monthly chart shows the SPX is now in a more mature cyclical phase when you consider
the MACD and price momentum indicators. SPX 10 Year Monthly Chart Notice how MACD
has flattened out and note also the deceleration of price momentum, both following the powerful
early phase of this cyclical advance.

How might we get into a "bonus" situation given especially the recent slowdown of the economy?
Well, the first thing to keep in mind is that the US economy still has ample slack in the facilities
operating rate as well as in labor supply. Moreover, there is no cyclical acceleration of inflation
or sustained upward pressure on short term interest rates that normally point to expansion peaks
and market tops. But the economy is running low on broad measures of liquidity, and without a
new, strong round of QE by the Fed or broader, more rapid private sector credit growth, the
economy is going to be left to operate off of internal fundamentals -- aggregate real wage growth
and business cash flow generation. Currently, gross real wage growth  is running at 2.2% yr/yr
with most of this reflecting job growth while business cash flow growth is now moderating
following a powerful recovery run over 2009 - 2011. So, on balance cyclical risk to the
economy is now on the rise despite the evident slack and absence of more normal pressures
that would signify overheating. The Fed's big gamble of resting QE thus rolls on.

How about the fiscal cliff, or the potential for higher taxes and mandated federal spending cuts?
In my view, it's just too early to tell now.

US Economic Outlook

The US hold on further economic recovery is tenuous at this point. There is enough residual monetary
liquidity in the system to underwrite further expansion, but the progress of the economy is near a
stall point, and without a dramatic announcement of additional easing by the Fed, a re-acceleration
of activity will depend greatly on whether consumer and business confidence might respond
positively to a narrow list of positives -- slight improvement in new order breadth indicators, a
larger than expected uptick in payroll employment and a decent rally over the past month in the
stock market. The Phila. Fed leading index shows the economy at a "fail safe" point wherein
additional loss of momentum might well signify a downturn: Philly Fed LEI Chart

My coincident economic indicators all point to a loss of momentum for the economy, but are
not flashing a sharp warning signal as yet. The yr/yr % growth of real retail sales dropped to a
low +2.5% in Jun. and further deterioration would be a very bad sign. Business has taken to
handing out very low pay increases again, and the recent pressure in fuel and food prices
will trim discretionary spending power unless confidence is there for folks to dip into savings
and increase the use of the credit card to finance stronger buying.

Fun With Jobs....

As suggested back on Jul. 6 and again in the postscript to monetary policy just below, US payroll
employment increased at a much better rate than was widely anticipated. So, readers of this
blog got a leg up on the news, and I can tell you that the "jobs kitty" has been reduced from 800K
down to 440K with today's report, thus leaving some additional leeway for stronger payroll
survey data over the next three months. The markets -- which focus on the US payrolls survey --
liked the "news" even though the entire report was not a good one.

But, now it is time to get back to some serious work, even acknowledging that payroll jobs
data could be spruced up further in the lead in to the election...

Monetary Policy

The Fed announces its latest rendition of monetary policy on Wed. Aug. 1. I confess I have been
an ardent student of how money and credit both reflect and affect the US economy since my
college days in the late 1950s. All of the different projects I have done on this subject suggest
clearly to me that monetary policy has a very powerful influence on economic affairs. So, I am a
believer in the old saw that: "The Fed writes the market letter". From my perspective, the US is
in, at best, lightly charted territory with regard to monetary policy  and the outlook for the economy.
With banking system interest earning asset growth at only 4% yr/yr and with my broad measure of
financial liquidity (financial system funding capacity) growing at only 2.6% yr/yr, the risk to
sustaining economic growth at even a modest 2% in real terms is pretty high, and the ability of
the economy to grow jobs sufficiently fast to bring down the unemployment rate is low looking out
over the next year. I continue to think the Fed is gambling with the recovery and that to be on
the safe side, the Fed should step up and provide substantial incremental monetary liquidity to
the system via purchases of quality fixed income securities. Banking System Credit Chart

If bank assets and funding were growing at 6% or better, I would be much more comfortable with
the economy and the stock market. The last time the Fed tinkered with a frozen monetary base and
neglible private sector credit growth was 1937 - 38, and as you have heard, that ended badly.
---------------------------------------------------------------------------------------------------------------

Possible Gamesmanship
Back on Jul. 6, I posted that the household employment survey had 800K jobs not yet picked
up in the payrolls survey data. Jul. Post With just about three months to go before the election,
it would not surprise me if payroll jobs growth did turn out stronger than now expected as
we head up to election day. I do not know whether the Fed is aware of this discrepancy in jobs
count or whether It cares much, but I have to say it could be a factor in their reasoning if the
FOMC has been "suitably apprised"......

Even so, I would like to see the Fed step up here at some point soon to provide more liquidity to
a system which needs it.

Gold -- Teed Up Again For QE (Say No To Godot)

The bugz have for only the 10th time over the past year rallied gold off the 1560 pivot line
(or less) in anticipation of further substantial QE by the major central banks, especially the Fed.
This week we have the Fed and the ECB with policy meetings and we also have Il Signore Draghi
trying to muster support to bend the iron will of the Bundesbank. Gold closed Fri. 7/27 just under
$1620 oz. and a fresh meme from the bugz is that the metal should be bought at $1620 to capture
a prospective big price run up as the Fed and /or the ECB finally launch big time QE programs.
Gold Price Chart A sudden sharp rise in price above $1620 is envisioned as a top side breakout
that would confirm another "breakdown" of monetary discipline.

Failure of the major CBs to come through this week with QE big time could knock the price
down for another test around $1550 -  1560. No doubt the bid has been there at those levels as
the bugz remain confident the CBs will ultimately relent and give them another large payday.

Since I think $1500 oz. is a bubble price for gold based on my fundamental and technical
work, I will continue to look for profitable shorting opportunities here and leave you to your
own devices. 

Stock Market -- Short Term

Technical
I warned in an understated fashion in the post below that the bears could get burned in this kind of
saw toothed advance and so they did. The market is building another "tooth" up, has taken out
earlier short term resistance, is showing  better price momentum, and even a little more volume.
SPX Chart

Today, the boys also rotated strongly out of Treasuries as the bottom panel of the chart, which
features the 30 yr. price, shows. It's been a few weeks since we last saw that kind of move and
it suggests an uptick in risk appetite as the week closed. Further rotation of this sort would
suggest increased staying power for the stock rally.

The $SPX has moved up to a 2.5% premium to the 25 day m/a. The guys have been clipping the
market up around 2.7% or slightly higher.

Short Run Fundamentals
My weekly cyclical fundamental indicator is showing further strength since making an interim
bottom on 6/22. A key factor in the improvement is unemployment insurance claims which have
dropped sharply here in July. Since a number of economists think the improvement may be
overstated for seasonal reasons, it is not clear how much of a factor weekly economic data are
in support the rally.

Federal Reserve Bank Credit is a little below where it was on 6/30/11 when QE 2 ended and
is down a little more in real terms. In my view, with private sector credit growth so modest,
the absence of any QE adds to fundamental risk for the market.

The Fed and The ECB -- Set To Gin up Liquidity?
A rising stock market with contested fundamental support suggests players are expecting either
a freash easing program by the Fed next week or stronger hints of same. Moreover, ECB head
Mario Draghi is talking BIG about new measures to provide liquidity to the EZ soon. First,
he has to take on the curmudgeonly, party pooping Bundesbank early next week. The latter has been heavy on the "nein" when it comes to outright buys of weak EZ sovereigns, so Mario has his
work cut out for him. Since both the US and the EZ are short on liquidity in my view, I do not
object to Ben and Mario pressing for more ease especially with fiscal policy moribund for now.

The issue for the market near term concerns how these central bank meetings and possible new
plans shape up. The evidence clearly suggests expectations by traders are running pretty high.

Stock Market -- Short Term

As outlined in several previous posts, I have not been impressed with the rally off the 6/1/12
low. My concerns have centered on lacklustre price momentum and volume. Price weakness
this week has brought a spate of negative and fundamental commentary to the web. My attitude
is that even though this rally has been unpersuasive so far, the sharp saw tooth pattern makes
it likely that a precisely correct call by anyone will be more a matter of luck than skill. $SPX

I would not want to call an end to the recent rally until after I have seen more technical damage
to the indicators shown on the chart.

From a fundamental point of view, there is an upcoming two day Fed FOMC policy meeting just
a week away. It is possible that there could be some intense handicapping re: further Fed
easing in the market over the next five trading days. It may well be that such handicapping has
already been contributing to the sharp chop in prices over the past six odd weeks.

Syria -- Ugly And Getting More Threatening

The boys of sunny Syria are rolling into full scale civil war. It's Sunni vs. Shia et al, a portable
conflict with centuries of hatreds behind it. NATO is pressing the House of Assad to give way.
The Saudis would like to see the Shia Crescent broken. The Iranians are keen to keep it. The
Russians are moving bird gunships and Marines into the country. Israel is freaking out on news
that Bashar and the boys are moving their chemical and biological warfare stocks around. El Q
would like to procure CBR weaponry and it is likely that the Sunni opposition has a few guys
who are not Jeffersonian democrats and might be tempted to put any pieces of CBR stuff out
on the open market. The US surely has to be concerned as do the Russian who have some hostile
Islamic militant neighbors. Turkey -- handling both provocation and refugees -- is finding its
patience strained. And of course, Lebanon shares the explosive interfaith mix evident in Syria.

Spillover and / or intervention by outsiders could put either of  or both Saudi Arabia or Iran
into the headlines, and let us keep in mind the Sunni / Shia fault line that runs through Iraq, which
is on a strong oil output ramp up.

There are three cushion billiard shot possibilities here that could wind up putting the supply
of oil in the region into play along with the price. Stay up to date on the Syria story.

Stock Market -- Weekly

Both weekly technicals and fundamentals are creeping, slouching toward positive. And therein
lies the main concern. Market rallies with a good degree of staying power rarely have such
humble beginnings. Breadth is clearly supportive, but volume and momentum are not. It appears
that few players want to give up on it as they did during the price corrections of 2010 and 2011
and this is likely because folks do not want to be caught off base if the Fed unveils a substantive
new QE program. I have always found trying to divine the collective psyche of the Fed to be an
exercise that rarely bares fruit, and my reading of reports by others reveals considerable
uncertainty about what the Fed might unveil, if anything. I have been on the sidelines for a
couple of months now and remain there. SPX Weekly Chart

Clean Out Day For Commodities & Oil

Commodities
I completed selling out my position in the commodities basket today as the ETF reached hefty
short term overbought levels. DBC Chart For more, see yesteray's post below.

Oil
As posted on June 2, I put oil on my buy list because it was deeply oversold in the short run.
I did go long shortly after, and this time out, I gave the USO oil price tracker a shot when West
Texas crude crossed back above $80 bl. I sold out this position today primarily because the
recent run up was just too zippy relative to fundamentals for my comfort .USO Chart
_____________________________________________________________________________
I am now about 90% cash. I do have a natural gas long position which I have been nuturing,
but this a long term postion I started last year, figuring if the guys at Exxon Mobil were willing
to put large $ to work exploring for and producing gas, maybe I should, too. Whatever your
feelings about this monster company, note that few careful observers have ever thought of
them as dumb.

Since I view the economic outlook for the US as very uncertain, my attitude toward trading
has been to look at deep oversolds and very hefty overboughts as candidates for long or
short positions. I will happily return to the oil and broad commodities market when good
shorter term opportunities arise. I have been very tempted to short the hell out of the long
Treasury market, but the stars have not lined up quite right yet. I have skipped the equities
market because volume and price momentum have not been convincing, although breadth
has been strong.

Commodities Market & Inflation Potential

Commodities
In a post on this broad market on June 4, I argued the commodities market was too oversold
to ignore and that I was looking for a long side entry on a bump up in the CRB comp. It came, I
bought the DBC ETF and enjoyed a moderate run. I am lightening up now because the market is
getting overbought short term and also because of the high volatility of commodities. CRB Chart
I lucked out some on this trade because of the drought in the midwest and plains which has
sharply punished prospects for grains.(The old saying is that "Wall Street kills the corn crop every
year",with this year shaping up as one where It has been right.)

Inflation Potential
Fuel prices have turned up along with basic foodstuffs and this is leading to a sharp  rise in my
inflation pressure gauge. It remains subdued, but when inflation pressure is ignited by upturns
in basic commodities, then you must be mindful because of the impact accelerating basic costs can
have on real household earnings and consumer confidence.

Stock Market -- Weekly

The post below did not make it out on Sun. 7/15 because of a severe thunderstorm that
took out the local internet and even destabilized wi fi...

Fundamentals
My weekly cyclical fundamental indicator (WCFI) has improved sharply over the past three weeks
primarily reflecting much weaker initial unemployment insurance claims data. That labor
development can happen around the July 4 holiday, so it will take a couple of more weeks of
data on claims to see if there was a merely seasonal brightening. If claims data stay weak,
that could be a nice plus for the market. The lack of stock market upward mobility over the
past two weeks despite improved key indicator news suggests players are waiting to see if the
better claims info is purely seasonal. Other categories of the WCFI have steadied -- a good sign.

Fed Bank Credit remains around where it was when QE 2 ended on 6/30 /11. Since the market is
now no higher than it was in the spring of 2011, it continues to show that an advance may well not be
sustained without further QE. My explanation for this remains that private sector credit growth
is simply too low to sustain a market advance without perhaps a major rotation out of Treasuries.

I think we are in unchartered waters here regarding money and credit balances. The closest we
come in terms of precedent is the 1937 - 38 period and since much of the monetary and credit
data for this difficult period is reconstructed, it is unwise to be dogmatic, but maybe prudent to
be cautious in the absence of further QE.

Technical
The weekly chart is inching toward a more positive bearing but reflects the lack of bullish
conviction that would add positive price momentum that is lacking. SPX Weekly Chart

Shanghai Stocks -- It's Been A Tough Go

My view since early 2011 was that tight money in China would slow the economy but shake out
inflation, thus leading to a more relaxed monetary regimen and a powerful recovery for the
Shanghai Comp. I initially thought the rally would come in Half 2 '11, but after watching the
PBOC keep the squeeze on over the course of the year, it became apparent no decent rally would
be in store until year's end. I used the FXI index fund to play the rally in late 2011 and made some
money, but players have continued to wring out the market in the wake of the advance early in the
year. $SSEC Chart

From a trading standpoint, watching the China market was barely worth the time. Now, we have
the PBOC in easing mode with liquidity and lending responding positively and we have a cheap
market at around 10X earnings. The market is oversold. It has yet to turn, but it is back on my
watch list as a long.

What I learned following China carefully over the last 18 months is that my style of monetary /
economic analysis works there, but, as with so many other markets, fundamentals, even if done
reasonably well, often do not help with timing.

To squeeze down inflation and shut off a speculative real estate boom, the PBOC took yr/yr
broad money growth down from 30% to 12.5% before easing up. This cut inflation from 6.5%
down to 2.2%, but production growth was slashed from nearly 20% yr/yr to less than 10%.
China's economy boat is obviously big enough now that it takes more time to turn it around.

My Western style analytical approach now tickets China's economy to re-accelerate positively
in the autumn of this year. I see enough skepticism in the market and in the global economic
media that I am not likely to initiate a new long position until the technicals turn. If  the Boyz
Of Beijing can pull off a moderate re-ignition of growth this year, the Shanghai Composite
could add at least 30% through mid-2013. So, I'll be happy to watch along.

Stock Market -- Short Term Technical

The SPX closed right smack on the closing price uptrend line of the rally underway since Jun 1.
SPX Chart Note as well that the short term MACD is threatening to roll over. As it is, the trend
up has not been inspiring, and a downside break would badly crimp the credibility of the recent
advance. So, the bulls need to step in now to keep this baby rolling.

Corporate Profits

Profits In Perspective
Based on a long term growth model with a base prior to WW2, SP 500 profits should be around
$90 per share in 2012. Consensus puts net per share this year at around $105. The positive and
cyclical deviation to "normal" is mild and based on past performance, would not qualify as
eyebrow raising unless SP 500 eps were to spike to $115. Profits have made a dramatic recovery
from sub-basement levels in early 2009, but current progress leaves net well below extended levels.

Sales
My primary top line growth model has the yr/yr business sales gain running about 6.7% on a monthly basis since mid - 2010. Physical output growth has moderated sharply from the strong rebound period
running into 2010, but has been a respectable 4% yr/yr over the past six months. Pricing power
has eroded sharply over the past year, especially for materials and fuels. The loss of pricing
power has been partly offset by higher volume growth until just recently.

A significant firming of the $USD over the past 12 months is going to operate as a drag factor
for a number of multinational companies, with currency translation penalties to affect both
reported sales and earnings.

Profit Margin
Profit margin factors were quite strong in favor of higher margins until mid-2011. Since then,
my price / cost index has dropped from a strong +1.4 to -2.9, indicating that an increasing
number of companies are going to show a decline in operating profit margin compared to last
year.

Investment strategists do tend to overdramatize the outlook for profit margin. There was
damage to margin in Q2 '12, but since physical output was quite respectable compared to
last year, there has yet to be the kind of downward pressure on operating rates that do the real
heavy damage to profit margins.

The Bottom Line
Over the past couple of years of economic recovery, investors observed handsome double
digit % gains in SP 500 net per share. With a stronger dollar in hand, and with price / cost
variables deteriorating, it will be much tougher for companies to continue posting such
impressive results. +5% yr/yr for the quarter just ended might not be bad for a goodly
number of companies.

Ongoing mildly positive earnings comparisons can sustain a cyclical bull market. However,
a sharp loss in positive growth momentum in profits as may now be occurring always
rquires extra due diligence for investors.

Stock Market -- Technical

Daily Chart
Once again, the rally in place since 6/1 was clipped hard when the SPX moved up around a 3%
premium to the 25 day m/a. Technically, the rally is still in place, but you need to take note that
the two day pullback from the 1374 close on Tue. to the close of 1355 on Fri. constituted a
failure to break above the Apr. / May '12 downtrend line. As mentioned back in the 7/3 post, a
pullback was in order, but the failure to penetrate the down line was a disappointment nonethe-
less.  $SPX daily To remain interestingly positive, the SPX needs to take out 1375 on the way
up over the next week or two.

Weekly Chart
This chart has treated me well over the past several years. I am still carrying an early May, 2012
sell signal, and even though the market has rallied, the important 12 week MACD measure has
yet to turn up and price momentum against the 40 wk m/a has not clearly reversed to the upside.
$SPX weekly I remain cautious based on the weekly chart, and if the current rally keeps perking
along, I am going to be late to the party.

Interesting Discrepancy In Jobs Count

The BLS runs two different job counts: a household survey and payrolls data. Over the long term,
the surveys diverge little, but there can be sharp divergences in the short run. The household survey
is more volatile and does not carry the documentation that the payroll data have behind it. But, the
household survey is broader and certainly more current than the payroll data as HR departments
have other pressing priorities. Most economists and investment managers follow the payroll info,
especially since it was once blessed by none other than Uncle Al Greenspan. I have long favored
the household survey because of its breadth and because it is more up to date. Well, since 10/11,
the household survey shows 2.1 mil. new jobs to only 1.3 mil. for payroll. Since the household
survey often leads payroll in timeliness, there are 800k jobs "in the can" which are not yet
reflected in the payroll data. Perhaps this discrepancy may just sit for a fair spell, and, perhaps
payroll is well understated. Since the BLS reports up through the labor secretary, a cabinet post,
and since it is a national election year, the 800K jobs discrepancy could play a role of some
sort between now and election day in early Nov. No big deal, but just something to keep in
mind, as the President may be looking for ways to put the best case he can before voters....

Stock Market -- Short Term

The June rally is extending into July with the SPX continuing in a confirmed short term uptrend. The
market is moderately overbought at a 3.6% premium to the the 25 day m/a, so no one should be
surprised if a little money comes off the table on Thurs., especially ahead of the employment report.
$SPX chart Note the positive cross for the extended time MACD in the first bottom panel of the
chart, but note as well that when the lines approach zero from below there can sometimes be a
stumble. If you scroll down to the 7/1 post for Sun. and click on "$NYAD" (in red), you will see
that breadth is breaking out to a new all-time high which frequently, but not always, portends a
new cycle high for the SPX.

The very bottom panel for the SPX chart shows that the broad, global stock market excluding the
US (GWL) is moving toward reversing an extended downtrend in relative strength as players are
starting to take on more risk as sentiment regarding the global economy improves and the US
dollar comes under some downward pressure.

The risk in the US stock market is elevating in my book as liquidity in the financial system is
growing far too slowly to suit me. Economic recovery momentum potential slowed significantly
in June. This would normally result in a weaker market, but there may be money in size betting
that "bad news is good news" in that further deceleration of the pace of the recovery may
result in a spanking new QE program from the Fed. That kind of guesswork is not my game
even though I would be happy to see the Fed step up and add more liquidity to the system.

Stock Market -- Weekly

Technical
This week the focus is on the NYSE adv. / dec. line. It shows a triple top formation of the a/d
line which suggests the market may be in a make or break situation for the near term as breadth
has stalled out around the current level several times already this year. $NYAD Cumulative
breadth needs to break out top side very soon to keep the long side of the market happy.

I have also included the Value Line equal weighted stock index (top panel). The price of the
"average stock" has lagged the improvement in breadth over the past year. One reason is that
more $ has been funneled into large cap stocks. As well, volume has been more constrained,
and this indicates a lighter $ flow into equities.

Fundamentals
My weekly cyclical fundamental indicator (WCFI) declined over the course of most of June,
but the stock market rallied strongly anyway. The SP 500 is up about 8.3% this year. The WCFI
is up only a paltry 0.2%. Clearly, market players are not behaving as slavishly toward weekly
economic data as they have been over most of the current economic recovery to date. I will
become more concerned about the discrepancy if the WCFI does not perform more strongly in
the weeks ahead should the market continue to rally.

Eurozone Status Check

The EZ continues to operate with too little monetary / financial liquidity to support economic
recovery. There had been a moderate bounceback in output from the deep recession of 2008 -
09, but the Euro area is down again this year, with declining production reflecting how even
a modest acceleration of inflation absorbed the very low rate of liquidity growth. Euro Produc

Euro stocks initially reached bear market levels at summer's end 2011, and have rallied a few
times since as the key EZ political players have tried to fashion programs to stabilize the market
for weaker sovereign credits as well as shore up a seriously overleveraged banking system.
Even though output has declined, the broad stock market has been able to hold support at or
around the 2011 lows as investors have looked forward to a period of renewed economic
recovery over the second half of this year. IEV / EURO 350

Modest fiscal stimulus is on tap ahead, and it appears the ECB will be better enabled to
re-capitalize area banks as needed on a more timely basis. This new development should
reduce a reasonable portion of the stress on the area's financial markets as it will allow more
direct intervention on behalf of banks experiencing well above normal withdrawals. The
EZ economy is subject to being lifted, if only temporarily, by confidence building measures
from the authorities. With "fiscal union" still on the drawing boards, The ECB and local
central banks must pressure the Bundesbank to allow the central banking facilities to
provide more money to the now credit starved system. With area unemployment at 11% and
inflation decelerating on a cyclical basis, success here -- still doubtful -- may be critical
to providing a stronger framework for recovery.

As a US guy, I have had no need to play in Europe's markets since the early 1970s. But
as the bottom panel on the chart shows, Euro stocks have been seriously underpreforming the
US market and some value may be developing. But, first, the ECB needs to collect more
power, even if on the fly, to help the zone get back on its feet.

Stock Mkt. -- Fundamentals & Strategy

Fundamentals
Longer term readers will recall that I turned bullish on the stock market at the end of 2008. It
has been quite a ride. The very best time to own stocks is when interest rates are low and the
Fed is adding liquidity to the system (QE) to push the economy forward. During these periods,
you are trading high return for the assumption of low risk. With no QE in the system now, and
with very low private sector credit growth and grossly uneven distribution of income both in
evidence, the US economy and stock market are both skating on thin ice. The continuing low
visibility for further economic recovery is reflected in a major suppression of the stock market's
p/e ratio and unusually large credit yield spreads in the corporate bond market for this point in
the cycle. The economy can continue to expand if the credit markets thaw further and if the real
wage can continue to improve without a weakening of employment that may come with lower
inflation but less economic demand. The risk to the economy is now elevated and as I have said
recently, the Fed is gambling with the recovery.

I see the Euro zone ticketed for a deflationary recession ahead in the absence of a substantial
easing of monetary policy and perhaps large local stimulus plans as well. In addition, although
I agree that Euro bank leverage is far too high, the regulatory order to deleverage substantially
in the years just ahead is imprudent and carries large risks well beyond the EZ to Asia where
businessess have been highly dependent on EZ banks for trade finance. On to China. When I
started the blog in 2005 I referred to Hu and Wen as the new running dogs of capitalism. I
regard these guys as political hacks who further championed China's mercantilism, and the
acceleration of gross imbalances within the economy. The 2008 stimulus program, although
impressively grand, was largely a monetary and credit affair. With China broad money
supply reaching 30% yr/yr and with loan growth far above output potential, Hu / Wen
produced "banana boat" economics which left the PBOC with one of the largest monetary
excess mop up jobs ever. They are still struggling to get the ship properly righted. The US
cannot escape being affected by these difficult problems.

Stock Market Strategy
You can make money in the stock market without QE by the Fed. But you are taking on more risk,
risk which intensifies the longer the Fed stays on the sidelines or reduces its balance sheet in
real terms. If private sector credit is flowing freely, the market can do fine. I use very little
capital to go long the market during these periods because all of the big bear markets have come
when monetary liquidity, as opposed to credit, is flat or shrinking. Nice credit flow can ward
off the day for a while, but the bear will catch up with you sooner or later.

So, I'll do some long trades with light capital and some short trades with heavier capital and
I'll also watch the Fed carefully to see if : a) They have a positive change of heart; or b) They
are pushed to extend large currency swaps abroad. If circumstances are not too dire, the
latter could prove rewarding since the Fed is injecting liquidity into the mix.

Oil Price

I remain interested in a possible long position in oil. This is an oversold market which is still
trending down in price. It is at significant discount to its 200 day m/a, shows as oversold on an
extended 40 day RSI and sports an attractive below 10 + DI on the short term ADX measure.
Oil normally winds up a period of seasonal weakness over the mid-jun. / mid-jul. interval.
But I plan to buy on an upturn in price with some short term support behind it. No clear entry
yet, and I may have to give it a few more weeks especially since Fed QE 3 is presently only a
sideline option. WTIC Chart

The $80 -100 bl. range shown on the chart reflects my expectation of the likely range over the
remainder of 2012.

Gold Price -- Bugz To Be Tested Again

A graceful bear market is developing with gold. The bugz, however, have made repeated stands
down around the pivotal $1560 oz. area and are about to have that bullish resolve tested again.
Gold Price Chart

The downtrend in the gold price since late summer 2011 reflects the deceleration of global
economic growth momentum and the absence of further QE by the Fed with exception of the
$100 bil. currency swap line the Fed put in place over the early months of 2012 and which has
been largely unwound. The late 2011 - early 2012 surge in the gold price may have also
reflected the ECB LTRO liquidity injection program od 12/11.

So the gold price is moving down toward an oversold on RSI, a move that has brough the bugz
out each time since gold started its cyclical advance in late 2008. the positive trendline of that
advance has been broken. The 200 day m/a has rolled over and the gold price has not even
tested it for a couple of months. So, it has come down to the pivot at $1560. Note, too, that
the rallies off that line have been weakening and that prior support in the $1640 - 60 area
has turned into resistance.

With the Fed now on the sideline with QE, the bugz have a stern test just ahead.

Stock Market -- Daily Chart

The Jun. rally off the 6/1 interim low did start with some classical features: The 6/1 level of
SPX 1272 was more than 5% below the 25 day m/a. The market was also "sold out" on breadth
and selling pressure measures, although not on volume. The rally has been strong enough to
reverse the downtrend in place since late Apr., and has been confirmed by rising 10 and 25 day
m/a ' s plus a positive cross of the 10 over the 25 day. SPX chart Note as well the positive turn
to the time-extended MACD I use. The light volume in evidence over the spring has been
extended during the rally.

On a price momentum basis, the rally is at an important short run juncture in that the SPX, at 2.9%
above the 25 day m/a is at a point where many of the up moves in the market since the early 2009
cyclical lows have been temporarily clipped. Thus, there may be some short term traders who
would be happy to book some profits. I would also note that since 2010, extended moves up in the
SPX to 5% above the 25 day m/a have turned out to be "sucker plays" that preceded price
corrections. This observation may have no relevance for the near term future, but is worth
keeping in mind if the bulls push the SPX up further in the days straight ahead.

Monetary Policy & Lady Luck

Federal Reserve Bank Credit is about where it was on 6/30/11 when QE 2 ended. There was a
nice positive jolt to liquidity during the winter when the Fed did currency swaps which added
$100 bil. or 3.5% to the Fed's balance sheet, but that has largely run off. The economy is now
running on what I think is inadequate credit driven liquidity, which when viewed generously is
running at a little over 3% yr/yr. Now the private sector credit situation is improving but it is
thawing out so slowly, that to rely on it to support further economic expansion, puts you in the
position of counting on a sustained warm smile in your face from Lady Luck. I am in the small
minority camp which thinks the Fed is gambling with the US economic recovery and that in the
absence of a speedy, broad based and sizable acceleration of credit demand, the Fed needs to
step in and provide a more open ended QE program until the credit markets come into better
balance. I'll be happy to take a large currency swap program in the interim, but foreign central
banks have to request it, and they'll do that more out of desperation than not.

The economy is not only dysfunctional with regard to private sector lending, it is also
dysfunctional with regard to the real wage and the distribution of profits. Thus, with continuing
low wage growth and no indication this policy is about to change, even a robust new QE
program will have limited success as rising commodity prices will ultimately push up the
inflation rate and further punish the real wage. But, more QE should help business confidence
and provide for some further progress in unlocking lending.

I think the US needs much larger fiscal stimulus to support the economy, but at present, official
Washington is at powerful loggerheads with interest tilted more toward cutting spending than
increasing it. This leaves the Fed as the main game in town, and unless Lady Luck smiles down
brilliantly and sustainably we could be the worse for it without a hefty new QE.

Economic Analysis -- US

My primary gauge for economic momentum -- the yr/yr % change of the dollar cost of industrial
production -- Was +6.5% through May. It has understandably decelerated from the strong initial
recovery "bounce" of nearly 10% seen in mid-2010. Monthly yr/yr readings so far in 2012 have
been in a range of +6.0 - +7.5%. Modest improvement in US output has been offset by weaker
export sales. A swing below +5% would signify possible downturn trouble. This measure has
supported expectations for profit margin expansion until very recently as a decleration of inflation
has led to reduced pricing power. Price vs. cost work for business now suggests the development
of slight downward pressure on profit margins.

This year started strongly, but my weekly and monthly shorter term leading indicators are pointing
to a further slowing of recovery momentum ahead.

My economic coincident indicator combines the yr/yr % change of four key factors -- real retail
sales, industrial production, civilian employment and the real wage. I equal weight them in
the calculation. The economy is strong at +4.0%, and is expanding normally at 3.0%. The latest
reading through May was a subpar +2.6%, and this reflects still low but improving employment
growth of 1.8% plus a 0.0% change in the real wage. The combination of a flat real wage and
sluggish employment growth does not support the idea of faster economic growth on a more
sustained basis.

My longest lead time cyclical indicator is Federal Reserve bank credit (FBC). It is down yr/yr
on an inflation adjusted basis. This signals to me that the economy must grow more credit
dependent to expand, often a normal development. With fiscal policy more constrained and with
my proxy for private sector credit demand rising only in range of 2 - 3%, I am not encouraged
by the credit situation, which is indeed recovering too slowly.

Stock Market -- Daily Chart

The recent bounce in the stock market remains unconvincing. The SPX has been unable to take out even minor resistance at 1325 and then again at 1332 and has failed at the 25 day m/a. On balance, a
downtrend remains in place -- lower highs and lower lows as well as a receding 25 day m/a. $SPX

The psyschology of trade is difficult here, too. Numerous reports in the financial media suggest
further monetary accomodation and stimulus in key quarters to complement the recent easing action
in China, but nothing concrete has yet been forthcoming. Moreover, with a big EU summit slated
for late June and with Italy's reform programs hitting snags in Its legislature, the bond guys have
put Italy's gov. bond into play, perhaps as a way of forcing the EU's hand. In this kind of
evironment the risk on trade can be very tricky business in the absence of solid news that
players can jump on with gusto.

Stock Market -- Weekly

Fundamentals
T'was a nice bounce last week which ran counter to the weekly cyclical fundamental indicator.
The WCFI declined yet again last week on continuing weakness in sensitive materials prices.
Investors and traders adopted the assumptions of more monetary / fiscal support through key areas
of the global economy and a settling down of Spain's private sector financial system (bailout
funds were offered). The Fed's balance sheet shrunk slightly further last week, signalling no
easing immediately at hand. Players wound up the week taking good news as "on the come" or
out ahead -- China monetary easing, G 20 worries about growth, the upcoming FOMC meeting
and yet another Euro summit with the US and the rest of non-Euro G20 breathing down Merkel's
neck. Positive breezes, but breezes nonetheless.

Technical
Last week's rally came off "sold out" readings for breadth and for selling pressure per share, but
there was no strong "give up" volume to mark the end of the downturn as there was in the late
stages of the 2010 and 2011 price corrections. My weekly chart remains negative and the
intermediate term sell signal of early May remains in effect. The chart indicators have not
turned positive and show further room to the downside. The weekly SPX chart has been very
helpful over the past couple of years, so it has my respect. $SPX weekly

I did not post the SPX daily chart. It looks a little better, but price failed to take out the 25 day
m/a, leaving me with the same uncertainty as the weekly. I will probably watch the shorter
term action carefully this week to see if the rally does have any legs beyond last week's pop.

US Economy & Stock Market

Economy
The US economy continues to recover, but remains fragile. I am concerned about three factors.

1. When seen in the aggregate, or collectively, US business continues to behave stupidly. Yes,
corporate profits have recovered dramatically, with earnings moving into new high ground. But,
managements are not rewarding most employees for a substantial improvement in productivity.
Handing out wage increases of 1-2% adds to profit margins, but with inflation topping 2%, the
real wage remains negative, forcing most householders to dip into savings to boost consumption.
Retail sales have improved very nicely, but should consumers take a few months off to boost
the now low savings cushion, the economy will become vulnerable in a hurry. It is my belief
that corporate greed re: profit margins is a major reason why the market's p/e ratio is well
below normal for a low inflation environment with rising net per share.

2. The media has spotted a trend among US manufacturers to bring more production home and
is also smitten with the new growth of US hydrocarbons production . All well and good.
However, over the first years of recovery through mid - 2011, US export sales increased by
roughly 25% per annum, and contributed very substantially to economic recovery. Over the past
year through Apr., such sales increased by only 3.5%. So, there has been a dramatic deceleration
of export sales growth owing to sharply lower global growth.

3. When banker behavoir is viewed collectively, they are behaving as stupidly as they were
over 2003 - 2007, when they threw money at folks coming in for home loans in an overheated
housing market. Now, bankers are freezing out even well qualified borrowers because of a
preoccupation with collateral value. Naturally, if lenders remain dumbly conservative, the
collateral values have little chance to recover much. Since the wealth of most Americans is
tied up in residential real estate, super conservative bankers are contributing to the pressure
on household wealth and are greatly inhibiting prospects for a recovery of housing and
consumer confidence. As well, Tea party adherents who freaked out over the prospect of
US Gov't aid to the distressed real estate market now see the fruits of such behavoir : deeply
depressed home values, including their own. Vibrant real estate activity contributes to the
liquidity in the financial system and in that regard is a positive for the stock market.

Stock Market
The fragility of the US economic recovery and the slowing of growth momentum of the global
economy suppress the capitalization of earnings (p/e ratio).  But there is another important
reason why stocks have only drifted modestly higher over the past two years. There is not an
abundance of liquidity in the system. Money market fund cash reserves have been drawn down
sharply over the past two years, and my measure of broad based, credit - driven financial
liquidity is up but 3% over the past year, far less than total US business sales. There is
precious little loose change around for stocks. Now, there is a very large trove of money in
the US Treasury market. Viewed long term, Trasury notes and bonds are hyper- inflated. But,
to shake that excess money out of Treasuries for more than a trade is going to require a
far more balanced US economic recovery / expansion than what we have seen to date.

And this brings us to the Fed. Should inflation continue to decelerate and veer toward deflation,
the Fed would have an eminently justifiable pretext to step in with a sizable new QE program.
Inflation which goes south of 2% and an unemployment rate of over 8% would leave the Fed
little choice.

Fiscal policy? It has been too conservative in my view, and it is too early in this election
year to tell whether official Wash. DC will make things worse.

Euro Area -- My Bottom Line Case

In terms of critical measures such as monetary liquidity and broader, credit driven liquidity Euro
area monetary policy has been too tight over the past four or so years. It is not replicating the
 liquidity tightening in the US evident over the 2004 - 2008 period, but the results could be
very hazardous noetheless. In recent years, the EZ has experienced sizable deposit withdrawals and
bank dis-intermediation, and, by imposing new capitalization rules on its banks, the EZ is
inviting banks to reduce admittedly high leverage via cutting asset holdings. Thus, the Euro area
is experiencing both inadequate liquidity growth in real terms and a developing credit deflation
in real terms. These squeezes do not just invite economic weakness, they invite more serious
deflationary recession. ECB money / credit  Money, adjusted for inflation, is starting to disappear
from the system.

US history shows there is a decent relationship between the duration of a liquidity squeeze and
the severity of the subsequent economic downturn. The Euro area is now cruising along toward progressively more treacherous waters, which when reached, could produce a broadscale economic emergency. The longer the EU waits to commit to reliquifying its economy, the worse the losses
in output, jobs and social stability are likely to be.

Now, the Euro area recession does show signs of deepening and broadening. So, EZ officials
are likely going to have to provide fiscal as well as the critical monetary support to avoid far
deeper problems down the road.

Diverse politics and the cumbersome structure of the EZ power centers have made this process
very frustrating for investors and traders. If I was a younger guy, I suspect I would be quite
fascinated with this very important piece of history playing out in front of us. But, as an
emerging geezer, I think I'll stick with the monetary tools I've learned watching the Fed for
nearly 50 years and keep my eye on what the ECB does and shows datawise.

Hopes have taken an upswing with another EU summit out ahead for late June. Note on the
accompanying chart of Euro Stoxx 50 how key indicators are trying to bottom and note as well
the large surge of volume that went with the recent sell down. Euro Stoxx 50

Commodities Market

As the momentum of global economic growth has slowed further this spring, the commodities market
has suffered substantially. It has broken important support as traders have become progressively more
concerned about the global economy and the outlook for China in particular. The China economy
has slowed precipitously and so far, monetary policy accomodation and proposals for new fiscal
stimulus have been muted as China policymakers look at more modest support for the economy in
preference to a large scale program like 2008 - 2010, when sizable "fat tail" risk arose in the
form of more inflation and an unsustainable real estate boom.

Well, I have not given up on the global economy for this cycle yet. With business confidence easily
shaken both here in the states and abroad, it would seem that G 20 may want to look at the potential
for more stimulus at its mid-year confab, and as announced today, G 7 may want to look at how it
and the EU can provide greater assurances of available liquidity for a stressed southern tier EU
banking system.

So, with commodities under pressure but substantially oversold, I am happy to look for trades
here, particularly broad baskets. I would also look first for a positive turn in the broad market
like the CRB composite. Here is the CRB chart.

I also link to my Apr. 24 discussion of the commodities market here.

Stock Market -- Short Term

Technical
Following a suspect and uninspiring bump up over the 5/19 - 5/29 period, the market has resumed
the downtrend. It remains moderately oversold on a price momentum basis and is approaching a
short term "sold out" position, with only a very short interval of acute selling pressure on elevated
volume needed to signal a more durable low zone. The SPX has entered a pivotal area of 1275 -
1250. A decline through this area would throw open the question of a break away downer. SPX

Fundamentals
The weekly fundamental cyclical indicator (WCFI) has accelerated mildly to the downside
over the past two weeks reflecting further weakness in sensitive materials prices and a slight
edging down of the weekly coincident indicator (10 discrete data series).

The Fed continues to hold the line on expanding its balance sheet and is actually running about
$25 bil. below the level of 6/30/11 when QE 2 was completed. The time is approaching when
this extended flatness in Fed Credit will force me to downgrade my core stock fundamentals
indicator as well as the longer term outlook for the economy (More later this week).

Demand for currency swap lines from abroad remains quiet despite the Euro area hub bub.

Risk Off vs. Risk On
The global economic expansion is at greater risk than it was in the spring / summer seasons of
2010 and 2011, when preference also swung from risk on -- stocks, commodities, oil etc. to
risk off -- Treasuries, German Bund, USD Global PMI - Mfg. However, many of the risk on
assets are oversold while a big risk off favorite -- Treasuries -- are extravagently overpriced
on a longer term basis. I strongly prefer simply to be in cash and equivalent than the risk off
choices and I also think concern about the US economic position is currently overblown ( the
household survey portion of the employment report which, although volatile, does lead the
payroll portion showed 422k new jobs in May, and the US PMI for mfg. gave a strong 60.1
reading for new orders). Finally, there is another formal EU summit on tap for late June, and
officials who want to see the EU accelerate the process toward fiscal union are coming out of
the woodwork with dire messages to hold a torch to Mrs. Merkel's ample butt to move
forward with a plan to keep the EU together. Even guys like George Soros and other economists
and pundits are getting into the act. Not easy to stand tough when the world is laying its troubles
at your doorstep.

Oil Price Postscript

Tack this one on to the 5/29 post on oil (which links to the weekly WTIC chart).

The WTIC oil price has weakened further, down to $83 and change. A significant oversold is
developing for the oil price. It is headed down to the bottom of a range of $80 - 100 bl. which I
have felt is reasonable out through 2012. On a linear chart, oil, like the SPX, has broken down
from a 3+ year uptrend as worries about the global economic expansion's staying power have
again risen sharply.

I am watching it closely. The downside trading volume for the contract is approaching exhaustion
levels, and RSI and MACD are deeply down on the daily chart. WTIC daily

Since it is rarely smart to try to "catch a falling knife", I am going to watch for a little stability
in the price first. The chart includes  the exchange traded USO (bottom panel).