Stock Market Comments

Fundamentals
Reflecting the global trend, US business sales growth has steadily lost momentum over the
past 18 months reflecting a deceleration of volume growth and a loss of pricing power. Profit
margins have ebbed modestly on a deterioration of the selling price / cost ratio  for business.
More recently, the US operating rate for business has also ebbed modestly, which further
curbs efficiency. Recession in Europe and sharply slowing growth in main Asian economies
have significantly curtailed US export sales momentum.

It has been my argument that by shrinking the prime base of monetary liquidity since mid -
2011, the Federal Reserve was gambling with the US economic recovery. Fortunately, since
the basic money supply in the US financial system did not suffer a loss of growth momentum
below danger levels while private sector credit growth began to expand modestly, the system
has not sustained the kind of liquidity privation that assures a full blown recession. There has
been damage, but so far, luck has been a lady for the Fed.

Monetary policy regarding liquidity has reversed from negative to positive. When there is a
deep downturn and low business and consumer confidence, a QE program can take up to a
year to foster recovery, but, when there has been only an economic slowdown with no large
loss of confidence, QE can bring support far, far more rapidly. Still, the Fed should speed up
Its program as it is behind schedule.

Ongoing QE and grinding improvement in private sector credit demand set a more positive base
case for the US economy in 2013. There may well be a hit to growth next year from resolution
of the fiscal cliff issue, but it is still too early to tell how large a penalty there will be. The
sensible course is for official Washington to strike a deal which both sides can crow about but
which does minimal economic damage to the real economy through mid - 2014. We'll see.

My core fundametals signal a positive environment for stocks next year provided the Fed does
not welch on its QE commitment. Stock market volatility should increase between now and
early Jan. as the President and  the Congress work their wills with the fiscal cliff.

When I look at cash reserves in the system, I think funds are already heavily deployed. Thus,
for the stock market to have a strong year, money is going to have to come out of the bond
market which has been a huge beneficiary of the deep recession / slow, painful recovery we
have witnessed over the past 5 years.

Technical
The market has been in sharp recovery mode over the past week. The tradable price
momentum oversold has been wiped out. The market has also been in a saw tooth down
pattern which should be tested this coming week on heavier volume. The price bounce is still
too young to have turned my indicators. I note however, that contrary to longer term history,
the market has been able to rally off the sharp down spikes in price over much of the current
cyclical bull advance as changes in trader sentiment have appeared to happen very rapidly. I
would love to see a retest of the recent low, but traders have been far less cautious during this
market. SPX Daily Chart

Call Me Old Fashioned...

Stocks
Today was a dud following yesterday's big advance. Big one day upmoves without positive
follow - through the next few days are off-putting. Sometimes a big one day move during
a downturn reflects fast short covering by traders caught flatfooted by a positive news item
and sometimes it reflects positive interest but with a lack of conviction. It is like a band
wagon that only goes for a couple yards before encountering challenges. At any rate, if you
are freshly long, watch carefully for some decent follow-through in the days ahead.

Oil Price
My plan has been to go long oil near year's end or in early 2013. The oil market is in its
weakest seasonal period of the year and I was hoping that with global economic activity
still very sluggish, I could take a long position and pick up oil with WTIC down in the
75 - 80 area over the next month or two with an eye toward holding it through 9/13, as I
think US attention will re-focus on Iran and its nuclear program now that the election is over.
I am assuming Iran is providing financial encouragement to Hamas now to message the West
that It can make trouble and create some war fatigue in Israel. But, I think the US will
return to the Iran nuke issue next year anyway.

The oil price is having a counter - seasonal rally here as traders play with Israel vs Hamas
and the newly positive vibe on settling the fiscal cliff issue here in the US. I do not want to
be piggy and wait for $80 bl. or lower, but I'll probably sit on my hands for a spot longer.

WTIC Chart

Stock Market -- Daily Chart

I am now seeing a rash of "ok now to buy the correction" strategy pieces. It is true that we
have witnessed a "garden variety" type price correction. Moreover, I have been looking to see
what traders might do if the SPX fell 5% below its declining 25 day m/a. It did so this week
and there was a minor bounce. Finally, on Fri. just passed, House Speaker Boehner (R-OH)
indicated that revenues were on the table re: the fiscal cliff issue. That comment served to
cool fears that the US would head pell mell right over the cliff into deep austerity. So, since
the market has hit a more respectable oversold, there may be some positive carry into the
coming week, so long as nothing else of material consequence intervenes ( Gaza, bad vibe
on the Sunday talk shows etc.). I note as well that the Fed moved in late in its reporting period
last week to buy a large slug of MBS as well as some Treasuries. That probably did not go
unnoticed by traders (and was also overdue).

However, the SPX did experience a fast breakaway down move in recent weeks and it is
often the case that the market can bounce after the quick break down only to move back for a
retest of the low to verify support is really there. Keep that in mind.

I have linked to the daily SPX chart and you will note the top panel features the relative
strength of the SP 500 against the long Treasury. I would be watching this carefully as well
since the economy is sluggish enough to keep my weekly and monthly fundamental indicators
for the long T price in positive territory. How sluggish are things? Plenty. When the US economy
is humming along at a moderate pace my coincident economic indicator should be running
around +3.0% yr/yr. The reading for Oct. was +1.2% -- low and sloppy.

SPX Daily Chart

Stock Market Quickie

A tough Obama line on the fiscal cliff, ugliness in the streets in some southern EZ capitals
and, not to be outdone, Israel bombs Hamas and launches tank fire down into Syria from
the Golan. The US stock market is now in breakaway down mode, and the road map on
breakaways is unfortunately sketchy. The SPX is approaching a decently tradable 5%
discount to its 25 day m/a. The action in recent days shows failure to hold positive moves
early in the day, but with a deeper oversold now at hand, a stronger test of intent is ahead.
SPX Daily

Eurozone Status Check

Critically needed monetary liquidity growth is wavering after a modest advance.
The broader money supply remains negative in real terms as EZ private sector credit
continues to decline. The EZ recession-- still mild --  has been slowly deepening and
broadening. The Euro and the stock market remain well off lows based on the
promise of sizable securities purchases from the ECB (If only the needy would ask
for it).

Euro stocks as a group outperformed the US market in the recent rally from early Jun.
even though the Euro weakened against the US$ and fundamentals fared worse compared
to the US. The recent strong comparitive equities performance in the EZ is far too
sophisticated a move for a guy like me who sits a wide ocean apart from Euroland.

IEV and $XEU chart

Stock Market -- Weekly

Fundamentals
In summary, the shorter term fundamentals suggest a flat / slightly weak market which
could turn positive at the drop of a hat. The weekly cyclical fundamental indicator has
edged down moderately from early Oct. It has not lost much ground in the last couple of
weeks, and, looking across the values, there is a little more stability. The Fed has been
missing in action on QE 3 in recent weeks. With the election out of the way, perhaps the
Fed will find a postive groove in the weeks ahead. With the holidays coming, the Fed
will need to add liquidity to the system for seasonal reasons even if They are having
second thoughts on the QE 3 program. Resumption of QE will be supportive of stocks.
Right now, the Wash. DC official players are speeding toward the fiscal cliff, but matters
can always change quickly and positively if a deal is struck which metes out the economic
damage in a gradual fashion. Expect a sky clouded by trial balloons from Wash. and a
multitude of of suggestions from our many wizardy pundits.

Technical
My weekly SPX chart still has us in a down market that is still significantly above the
kind of deep oversold which would signal that a strong rally may be close at hand. Again,
we also see a market which has fallen below the longer term cyclical trend (This also
happened in early Jun. '12, but we had a quick "down and back"). Weekly SPX

I have also linked to the NYSE advance - decline chart. It is a weekly chart and notice
that a 6 wk m/a of -1000 has yielded nice buy signals. Notice as well that market
advances have proceeded without the 6 wk m/a having to hit -1000 (Apply your own
parameters). Weekly $NYAD with weekly $NYA

Time For Obama To Kick Some Ass

Most traders and invesment people think official Washington will find a few ways to
circumvent the upcoming fiscal cliff. I do not share that view. Instead, I see a wider
political battle over who governs -- the House of Representitives or the White House --
that could end with a fiscal cliff dive. Today, House Speaker Boehner (R - OH) not
only drew a hard line in the sand on maintaining the full income tax rate structure but
linked a prospective bargain to an upcoming vote on the US debt ceiling which could
come in Feb. 2013. Obama's line in the sand is a bit more squiggly, but top Democrats in
the Senate are drawing a firmer line on tax rates as are WH spokesmen. But Boehner
threw down the gauntlet by threatening to use the debt ceiling issue as a blackmail
ploy.

The easy thing to advise here is to figure there will be deals that settle the matter for
a goodly period but that the markets could be volatile until the deals are clear. However,
since I believe the House wishes to govern the country rather than the President, I
think Obama will have to confront them head on not only because the presidency is being
challenged but also because he will lose the support of his party and most of the country
if he fails to stand up to this unenlightened group of House conservatives and Tea Party
zealots. His academic specialty was constitutional law, and surely he must recognize when
the presidency is being challeneged. So, I see him vetoing any deal if he does not get what
he wants. In this regard, he has already made clear his willingness to agree to a range of
spending cuts.

When 2013 opens, there is a good possibility the US will go over the cliff unless the House
caves in on taxes and agrees to slim down the future defense budget. Moreover, not only
must Obama take his case to the country but he must also make clear to House members he
will use the levers of the executive branch to punish their districts if they will not budge on
raising high earner tax rates.

You know, in the US, race is never far below the surface socially and politically. The wealthy
white folks who run the GOP have their political views to which they are entitled, but to me,
there is the clear undercurrent of heavy aversion to taking leadership from a man of color and
especially from a guy who is clearly brighter and more articulate than they are. This racial
element and paranoia it engenders greatly increases the obstinacy of the House GOP. Not
only that, but the white guys know Obama does not want to appear "uppity" and "ornery" lest
he be seen as a bad ass dude who needs to be corraled. Obama has avoided this sort of
confrontation so far, but it may well be unavoidable now if Boehner and his guys decide the
public will ultimately support the white folks in a showdown. How Obama has maintained
his poise with these guys is quite something.

Unless the GOP caves on increasing tax revenues, it will be high time for Obama to kick some
ass.

Stock Market Comment

In the immediate aftermath of the election, official Washington is abuzz about restoring
fiscal integrity and resolving the cliff (1/1/13 expiration of tax cuts and mandated spending
cuts). Business leaders are clamoring for a budget deficit reduction accord so they can
run their business plans more effectively. However, any fix worthy of the name will do
damage to the real economy.

Monthly new order rates through Oct. in the US are trending up but suggest modest growth.
The global situation is more precarious, with nominal growth indicated but butttressed by
the US. My weekly forward looking economic indicators rose from Jun. - early Oct. but
have now eased down and may well continue under modest pressure over the next few
weeks. No hint yet of a more serious erosion in the outlook.

From a pragmatic political point of view, now is a good time to secure some revenue
increases and cut fiscal spending in selected areas since there will not be another election
until Nov. 2014, two years hence.

With Washington now newly reverential toward reaching a budget deal in a fragile global
economy, one can easily understand an extension of the correction in the stock market. And,
to add worry to woe, the EZ is showing economic slippage again (Germany) while here at
home, the Federal Reserve has yet to move on QE 3 with any brio or consistency.

The Fed needs to get moving on QE 3. Obama and the Congress need to signal fast that any
budget accord will kick in proressively with only mild penalties for growth next year to
avoid damaging consumer and business fundamentals and confidence. The EZ? Well, I
will return to that later in the week.

I include the daily SPX chart with the post. SPX The downtrend is clear and confirmed by
the indicators. The market is not substantially oversold, but is at a level that may prove
tempting to a range of short term traders.

Thumped...

Hurricane Sandy was everything they said it was going to be. In our town, we had a nearly
100% power blackout. Prior to the storm, I had arranged to have a fine young man come and
install a 7000 watt generator over Thanksgiving. Bad timing. Instead, I had to quickly
refurbish two, old, large kerosene heaters and zip around and under fallen trees and power
lines to pick up kerosene cannisters. They worked fine at keeping the home reasonably
warm, but the house smells like a refinery. There is another big nor 'easter bearing down on
us with the promise of some snow. I call our utility SC & D Co. (Silence, Cold and Darkness).
Since they are not the most reliable guys around, let me squeeze in a post between storms.

The stock market is still technically in correction mode, although the SPX has found support
a bit above 1400. My weekly cyclical fundamental indicator has been running flat in recent
weeks and the Fed has been conning us about QE 3, as total Fed Bank Credit has also turned
flat and is well below mid - 2011 levels at the end of QE 2.

The presidential election is tomorrow and we hope for a clean result sans an army of rival
litigators and trips to the courts. I am voting for Obama but I would not wager on a victory for
him. If Mitt The Bullshitter wins, there will be new layers of uncertainty to work through
regarding both fiscal and monetary policy and the market may turn volatile as players hustle
to try and handicap the new environment.

The oncoming nor 'easter is going to be nasty, but I am inclined to think the power in our
area will hold up, and plan some catch up posts.

To finish up with a note on the hurricane. I grew up in a lovely community down along the
bay on Long Island. The family contended with some serious hurricanes with torrential
rainfall which caused some mild flooding. With Sandy, the old homestead wound up under
five feet of water, and the flood continued for another mile inland. The roads are still
impassable.

A Note On Short Term Interest Rates

The Fed's zero short term interest rate policy has, save for the Libor scandal, put the
usually hot topic of whither short rates on ice for markets players here. The US has
experienced over three years of economic recovery and it is interesting that the
indicators I track to determine whether the Fed might change the Fed Funds rate (FFR%)
 have never aligned 100% to support a rise in the FFR%. In fact, recently the positive
momentum of each of the indicators have turned to mostly flat, suggesting no cyclical
case for raising rates.

My super long term 91 day T-bill model points to a reduction of rates currently, but,
the model also suggests ongoing rate suppression as it suggests the "Bill" should be
yielding 2.4%. Savers are being punished but with positive offsets in retirement and 401k
accounts and a nascent recovery of home prices. It has been a long slog.
-------------------------------------------------------------------------------------------------------
Threat of local power outage from the giant Hurricane Sandy storm remains.

Financial System Liquidity

Over the past 12 months, Federal Reserve bank credit has declined moderately as the
Fed largely stayed away from QE and even allowed credits to run off. The private
sector component of the banking system did step up and expand its asset base by over 5%
yr/yr. However, following the deceleration of the economic recovery into the summer,
the banking system eased off on asset expansion. With the new open ended QE 3 program
now underway, the Fed has stepped up its lending, targeting mortgage backed securities.
Thus, the Fed is again now helping to underwrite liquidity growth within the system.

The banks' primary goals over the past year have  been to maintain balance sheet liquidity
and rebuild equity capital, including by allowing the system's aggregate loan loss reserve
to deplete on business recovery and the charge off of more bad credits. Commercial /
industrial lending has been moderately strong, consumer loans have taken a slight positive
turn and the large real estate loan book has been flat. The latter reflects charge offs, loan
sales, and a keen interest in mortgage refinancing. However, public funding via asset
based securities has continued to decline.

The banks have not been working hard to fund asset expansion. Two key categories --
low / no jumbo deposits and commerial paper -- remain in decline as the banks return to
lending in a modest and gradual fashion. The Fed has judged that economic demand
conditions and the slow pace of recovery for the banking system's loan book call for
additional liquidity backstopping even as the banks continue to improve their finances
and lending activity.

Genuine Storm Ahead

Hurricane Sandy, a massive Cat. 1 storm is now embedded in a powerful Nor' Easter
(coastal storm). It is projected to make landfall tomorrow near Atlantic City NJ (Trump
is reviewing his various damage indemnity policies). The storm will bringing drenching
rain, a possible record storm surge and high winds. The NYC transit system will be
completely shut down by 9 pm tonight EDT and Mayor Bloomberg has ordered mandatory
evacuation of the downtown financial district. The NYSE may still try to open tomorrow
for those with hipwaders and who love to walk in the rain and work in the dark.

Since my town up north is likely to lose power, this may be the last post you see for a few
days. The one saving grace I see is that the power companies will be under enormous pressure
to have the power fully up and running before election day, Nov. 6.

Stock Market -- Weekly

The daily SPX chart has the market in correction and now the weekly chart has turned
down as well. SPX Weekly I am carrying a link to the daily SPX and its 200 day m/a
price oscillator. SPX + 200 day osc. The drop in the oscillator has been sharp enough to
trigger an intermediate term sell signal for the SPX

The basis for the sell signal does whipsaw on occasion, but when it does it usually happens
quickly. If not,  the market does tend to trend lower. If you stay with the SPX + 200 day osc.
chart, I noted last spring that when the oscillator tops +10%, the odds are only about one in
four that the market can go on to sustain new high ground. This obervation is based on nearly
30 years of data and has served me well. You will note that the SPX has declined back inside
the spring 2012 high of just over 1420 for the SPX. So, from a statistical / technical point
of view, the market has been on shaky ground since the spring spike in the price oscillator.
I need to add here that the significance of the 10% rule on the oscillator does start to fade
somewhat after a six month time period.

My weekly cyclical fundamental indicator (WCFI) has clearly turned down in recent weeks
reflecting an upturn in jobless claims and a reversal for sensitive materials prices. It is
striking that the stock market and industrial commodities prices have weakend since the first
presidential debate when Obama flopped and let Romney back in the race. Now, I think
concern over the resolution of the tax and spending issues embodied in the fiscal cliff issue
were due to bother investors and business confidence as as the deadline for resolution draws
ever more near. The Romney resurgence adds another layer of uncertainty to the fiscal cliff
problem and, as important, puts the future of Fed QE 3 into play given Romney's negative
view of Fed. policy.

If Obama were to win on Nov. 6, the fight over resolution of the fiscal cliff would clarify
and investor / trader worries over the sustainability of QE would also fall away. An
Obama victory could well trigger a relief rally and produce a whipsaw on the new sell
signal.

Oil Price

In my view, the oil price is experiencing its first normal seasonal price decline since
2006. I am looking for WTIC crude -- now around $86.25 bl. -- to fall to about $80.-
by the latter part of Dec. as gasoline demand slackens and before there is the final
ramp up for heating oil.

Next year, the oil price may again be influenced by geopolitics. With the national election
over, the US will take a much harder look at Iran's nuclear materials development program
and may even enter into bi - lateral, one on one talks with the Iranian government. Israel
plans new elections early next year, and the rightest Likud group may form an even more
conservative coalition which could lead to more provocative talk about Iran. Tehran has
also voiced an interest in curbing oil production further if tougher economic sanctions are
leveled against it. Finally, insurrection in Syria has intensified and some of the feared regional
spillover (Turkey, Lebanon) is in evidence. US / Iran direct talks, should they proceed,
will be accompanied by exceptional suspicion and mistrust built up over the past 60+ years
of run - ins of varied severity with the big fear being that Iran is simply playing for time.
A Romney presidency could well add initial bombast to the situation.

As a hedge on household costs escalating, I may again go long the oil price with a targeted
time of Dec. 2012 - Feb. 2013. That would situate me for seasonal price strength and allow
time for the geopolitical situation to develop further.

WTIC Price Chart

Gold Price

As it became apparent around mid-year 2012 that the Fed would move toward a new QE
program, the bugz declared a long gold trade as a cinch way toward large profits. Their
timing was exquisite as gold was sitting at very formidable support around $1550 oz.
Gold did take off as predicted, but has run into headwinds lately.

My monetary indicator for gold was negative a fair portion of the time since mid-2011,
but is now turning positive as the Fed is beginning to fulfill its promise of large open
market purchases of MBS. The gold market got nearly a five month jump on the new QE
program. My economic indicator has been in a downturn since spring 2011 based upon
an ongoing deceleration of global current $ industrial growth. This indicator has yet to
turn to the upside and has been a drag on the gold price since mid-2011 when downward
momentum firmly took hold.

the US dollar was widely expected to begin another decline on expectations of the new QE
program. It did so starting in early July this year, but has begun to firm up again in recent
weeks despite the generous QE operation the Fed has finally initiated. As the gold price chart
linked to just ahead clearly shows, the positive turn in the US dollar has chilled the gold
rally. $GOLD Chart ($GYX in the chart is an industrial metals composite.)

The US$ has surfaced as a "big dog" in the current uncertain environment which features the
fiscal cliff and election still ahead for the US, toubles and disagreement among the usual
suspects in the EZ, and no lift off in China, where the communist party is set to expel the
most prominent communist in that fabled land. So, the widely heralded large gold price
bonanza has been put on hold while the big dog US$ calls the shots. Note too, that the US
stock market rally has also been shelved since the dollar starting barking.

Stock Market -- Head Fake Ignored

The short run downtrend deepened today after traders ignored yesterday's late rally up to
minor support at the 50 day m/a. There is longer term trend line support at SPX 1400. In
my book, no interesting short term oversold comes along until the SPX cracks 1370 on
the chart. SPX

The media claims investors are concerned about disappointing earnings by large multi-
nationals. I am suspicious on this one since earnings potential had weakened obviously
beforehand and analysts had been trimming estimates. More likely I think is that the
more forward looking fundamentals in my weekly fundamental indicator index have lost
positive momentum in recent weeks. As well, I continue to think that investors are growing
more wary of how the politicos may handle the fast coming fiscal cliff, especially now
that the Romney campaign has revived in the polls following his most recent makeover as
a centrist. Reuters also reported today that Fed Chair. Bernanke has been telling buddies
that he is thinking about stepping down when his term expires in 2014. Welcome to the
Romney confusion. Mitt has been claiming he will replace Ben in 2014 if he is elected
president. And if he is elected, who would blame Bernanke for quitting even earlier since
Mitt has filed a no confidence vote on Bernanke already. It is doubtful the market will
be in favor of continuing Mitt vs Ben.

the Fed has finally starting expanding its balance sheet again. This is normally a  market
 positive except that the strong Jun. - Sep. rally already discounted the QE 3 kick off.

The media is going to run with the fiscal cliff and the election aftermath. On an historical
basis, consumer, business and investor confidence all remain subdued and possibly fragile.

I absolutely cannot stand people like Romney. For all I know, he may do some good things
if he wins on Nov.6. But if he does win, he will create unnecessary uncertainty, large dust
clouds for markets players and confusion. A Romney victory will see me take a far
more stripped down, nuts and bolts approach to this blog lest I get caught up in  all the
bullshit that could be headed our way.

The Street Scraps To Keep Market Up

It was a magnificently convenient day for the SPX today. The market is in a downtrend
on my short term indicators, but as fate would have it, the Boyz rallied it at the previous
10/12 low of 1429, and to compliment this fine bit of service, saw it settle at the 50 day
m/a. Sometimes, monkeyshines like this portend a significant  "save" and subsequent
rally, but often it is just a sucker's play to reel in shorts and get the tape players buzzing.

SPX

US Politics / Pragmatism

The current dreary national election campaign is scheduled to end on Nov. 6. The next
congressional election is in 2014 to be followed in 2016 by another national election. The
The "Fiscal Cliff" is set to arrive on 1/1/13. There are thus two and four year windows for
the president and the congress to quickly tackle the "Cliff" in early 2013 which would allow
about two years healing time after any "curative" action before the boyz face the electorate
again. If there is actually serious intent to take action to begin reducing the large US budget
deficit, early 2013 would appear to be the politically wise time to initiate plans to trim
the red ink.

Seasoned markets players know this and it would be natural for anxiety to rise further as
we reach the deadline. Given the still somewhat fragile nature of the recovery, political
masterminds would take small initial steps to rebalance revenues and expenditures for
2013 - 14, followed by somewhat larger measures to run over 2015 - 2020. This type
of blueprint would allow for adjustments in the economy to proceed in a more orderly
manner. It would raise economic / financial risk, but better allow the political class to
manage the political environment instead of simply kicking the can down the road. The
latter course would assure debt rating cuts and the acceleration of a festering issue --
growing income inequality. I would wager that the continued growth of income inequality
will produce further economic disequilibrium and destabilization and that when power
shifts to those who represent the less well endowed financially, the rich will be soaked at
least in proportion to the narrow breadth of economic progress if not more so.

Should Mr. Romney secure the presidency, we would have ourselves a "wild card"
situation. Romney is not just a serial flip - flopper, he is the very incarnation of the classic
American political huckster and one of the great political bullshitters of all time. Only
the good Lord knows what a character like this will do when he faces substantive
alternatives pressed upon him by angry and frightened political factions (An old pal of
mine recently said to me that Mitt will accomplish nothing as he will be too busy trying
to make up his mind). Rest assured, market players have had a good whiff of the man's
fabulous ambition and lack of conviction and principle.

The markets will have other interests in the weeks ahead, but it is likely that concerns
about management of the "Cliff" and the identities of the top political players who will
be in charge will be lurking.

US Stock Market Comment

The market has experienced a mild correction since mid - Sep. Moreover, my weekly
cyclical fundamental indicator (WCFI) has been rising over the period. The action of
the market has correlated negatively with the WCFI over the past three weeks as well,
and this counts as an unusual development. Now, since the start of the recent rally in
early Jun., the market did outperform the WCFI by a wide margin over most of the
period, so it is not unreasonable to allow for some catch - up from the short term
fundamentals. I note also that within the WCFI, sensitive materials prices have turned
flat and volatile in recent weeks and have failed to confirm an otherwise improving
economic outlook. Because industrial commodities prices can behave in accord with
micro supply / demand factors rather than macro factors over the shorter run, it is early
to claim that the upturn in mfg. and commercial order rates and retail sales will likely
prove shortlived. Even so, it may well have set some market players to wondering.

The long Treasury bond yield ($TYX) is very sensitive to industrial commodities prices
and as the SPX chart link below shows, an intial cyclical rise in the 30 yr yield has re-
cently been aborted, which suggests that bond traders are also not so sure that the economy
is setting up to do better. The short term technical indicators I use with the SPX  are
deteriorating, but the market did bounce off the 50 day m/a today, which traders who prefer
this m/a will find positive ( I prefer the 10 and 25 day ma's with a daily chart).

The loss of recovery momentum for sensitive materials prices and the fail of the 30 yr T
bond yield do provide a degree of corroboration to the idea that as we close in on the
end of calendar 2012 with likely election results not yet clear, capital markets players
may be growing more concerned about the eventual resolution of the "fiscal cliff" due up
on 1/1/13.

SPX Daily

Stock Market Fundamentals -- Part 2

Weekly Cyclical Fundamental Indicator (WCFI)
This broad based indicator turned up in mid-Jun. after a fairly sharp decline over May
and early Jun. Weekly leading economic indicator data are weighted heavily in this
proprietary index. The WCFI trend is usually coincident with the market's direction and
it tends to forshadow the direction of the real economy. The recovery of WCFI since
mid-Jun. has been modest so far and currently suggests only a mild acceleration of
economic growth in the months ahead. The stock market has advanced at a significantly
faster rate than the WCFI since Jun. and clearly suggests the market is discounting a
stronger re-acceleration of the economy once QE 3 kicks in. The stock market is out
ahead of the short term cyclical fundamentals by up to 5% by my estimate.

Noteworthy here is that US PMI new orders data for both manufacturing and services did
turn up substantially in Sep. Additional confirmation of a postive turn in economic growth
momentum is required to keep the stock market buoyant going forward.

Corporate Sales And Profits
Sales growth momentum measured yr/yr has retreated from peak recovery levels of 10-12%
in early 2010 to a sub-par 3-4% going into Sep. of this year. Output growth has decelerated
from the spring of 2010 (see production) and pricing power momentum has fallen off since
mid - 2011. My price / cost ratio has turned slightly negative, but the primary pressure on
profit margins has come mainly from weaker volume growth. SP 500 operating earnings
have plateaued around $92 - 100 per share on an annual basis.

The stock market can advance during periods of flat to slightly down earnings so long as
potential is there for a fresh positive turn in net per share down the road and in this case
the focus has been on the new and substantial QE 3 program at hand from the Fed. Unless
QE 3 fails to bolster confidence and output growth, it is reasonable now to look for
sales to gain 6% in the year ahead and for profit margins to recover modestly. Obviously,
there are concerns such as the possibility of a US fiscal policy mishap or failure of the
ECB and Eurozone to foster economic stabilization and eventual recovery. For now, I plan
to use the 6% top line growth assumption as the key marker.

Stock Market Technical Quickie

The action so far this week has turned the four month rally more vulnerable. SPX Chart
Specifically, the 40 day RSI is wavering again toward down and my extended time MACD
has turned negative for the first time since the rally commenced. The SPX has dropped
below its 25 day m/a and a shaky 10 day m/a is hovering just above the 25 day. The SPX
has survived breaks of the 25 day m/a during the rally, but rescues have come fast. We'll
see. In the meantime, with the MACD turning negative and the 10 day m/a off cue, traders
need to summon up extra focus.

Stock Market Fundamentals -- Part 1

Core Fundamentals
This approach is built on economic financial data available since the end of WW 2. But,
since 2008, the US economy has behaved more like the Great Depression era of the 1930s.
My traditional core fundamentals gave a buy signal around year's end 2008. There has been
no sell signal, and the fundamentals have not shielded us against the sharp, temporary price
breaks witnessed in each of 2010, 2011 and 2012.

The economic / financial system has been liquidity starved when it comes to private sector
credit demand and funding. Recognizing this, investor confidence has tended to plunge
periodically when the Fed has stood back from providing large infusions of monetary liquidity
needed to keep the economy afloat and to stave off the onset of deflation. Fed liquidity policy
has thus been the dominant variable.

As of 9/30/12, only two of my five central variables were positive -- short term interest
rates and the trend of "bottom of the barrel" BBB bond yields. On the negative side, yr/yr %
change measures of monetary liquidity have been decelerating and the trend of credit quality
spreads between investment grade bond classes has been deteriorating. In the latter case,
players have been chasing yield with short rates so low, but have strongly preferred quality.
(The junk bond market has been an exception as players have been plainly using this sector as
an equities substitute).

Net, net the economy has been through a period of monetary quantitative tightening since mid -
2011, save for the large but temporary liquidity swap program with foreign central banks that
came around the end of last year. In my view, this is a major reason for the deterioration of
economic recovery momentum that brought the US within "spitting distance" of a more serious
downturn this past summer.

Changes Ahead
The rally in the stock market since early Jun. has reflected growing investor and trader
confidence the Fed would initiate a new new QE program which it announced in mid-Sep. and
is about to implement now. It is a major open ended QE program that will boost monetary
liquidity measures back to positive readings, and one which should aid the economic recovery
and confidence. My core indicators should thus be turning more positive where it has most
counted in this cycle. In this case, investors got out ahead of the fundamentals thanks to
"coaching" from the Fed.

If official Washington flubs the 1/1/13 "fiscal cliff" -- scheduled tax increases and "mandated"
spending cuts, -- the US economy will be harmed. Since we could face a lame duck presidency
and congress after the Nov. 6, election, it is still too early to speculate on the workout of the
"cliff." Since I favor more fiscal stimulus rather than the introduction of any more fiscal drag or
austerity, I am in a small minority and am in no way enthused about what the turkeys in D.C.
may come up with. Do no harm boys.

More on fundamentals to come over the course of the week...   

Stock Market -- Weekly

This week I show the SPX along with the NYSE weekly index of net new highs. $NYHILO
This can be a rich comparison, and I leave you to retain my settings or add your own.

The hi - lo index is another way to measure buying pressure in the market because it shows
player willingness to buy stocks at or near new 52 wk highs. So, you see a cross - section
of momentum players and not too smart players who are chasing stocks. Note the chart is
showing the hi - lo is up near resistance and very far above attractive levels. You will
observe that the market can keep rising even as the index gets toppy but that when the
momentum of the chase turns south as measured by breaks below 50 in RSI and reversals to
MACD, well then you need to pay more careful attention (RSI and MACD are now still
positive but extended).

With a three day weekend ahead, and with Syria and Turkey exchanging light artillery fire,
you cannot blame traders for taking some profits off the table as they did today. Folks will
also want to check how restive the guys are in Tehran after the wholesale traders torched
the rial this week.

I thought I might do some more extensive posting on both stock and bond market fundamentals
in the days ahead. We are right on the cusp of when QE 3 is to begin. The markets have been
discounting the new liquidity injection process, especially the stock market. Still, it is
perhaps a good time to look in more detail at governing fundamentals.

Some Monetary Policy Issues

Power Of Talk
QE 3? Well, it has not started yet. This week the Fed allowed another $11 bil. to run off
Fed Bank Credit, bringing the total run off in FBC to $135 bil. since last Dec. It is amusing
that there are financial writers out there talking about how QE 3 is already affecting things
when there has not been any. The Fed is supposed to start up soon. It will take nearly four
months of the new program to bring FBC up to its prior peak.

Benny's Final Lap Around The Track?
The Mittster has made it quite clear that Bernanke is toast if he wins the election. It is the
least he can do for the super - right GOP guys who he threw under the bus in last night's
debate. Wall Street would not like it if Benny was cut loose, so the Mittster will hear
about it soon. If Romney is elected, it would be amusing if Benny said "Screw it, I don't
want to work for a guy who has threatened to lift my chairmanship." Whatever a Romney
presidency may create, assuredly it will create confusion.

Prime Funding Source Still Depressed
The Fed normally talks monetary policy in the context of the economy, employment and the
inflation rate. I have a far more "green eyeshade" view and regard the collapse of the market
for commercial paper as a primary reason the Fed has had to add mucho liquidity to the financial
system to keep it afloat. Comm'l Paper Outstanding (You should know that over $300 bil. of
such paper which was outstanding in 2008 was "disappeared" by the Fed through revision.)

Eurozone Status Check

Euro monetary policy is moving ever so slowly toward positive territory as central
banks battle economic weakness, credit contraction and capital flight. But the zone is
still lagging in providing the basic monetary liquidity needed to put in the cornerstone
for eventual growth. Significantly larger increments of liquidity would involve
swapping money flow for elements of sovereignty (e.g Spain currently). The EZ
economy has improved slightly recently, but all boom / bust measures remain in bust
territory. By my standards, the EZ is creeping in the right direction, but the rallies in
the $XEU and the IEV Eurostocks 350 are not fully supported by economic results on
the ground. IEV Chart

In reality, the IEV has probably rallied since early Jun. as much on the prospects for a
sizable new QE program by the Fed as anything else. Euro stocks may thus be functioning
as high beta trades as part of adding risk to a broad equities rally built not just on
the prospect of QE but its eventual success in contributung to US economic growth and
more confidence abroad as well. Fine by me, but this trade could be extra vulnerable to a
correction in the US market unless the ECB can get the aquiesence from sovereigns it does
require to be a more forceful supporter of the EZ's recovery. Note carefully as well the
current  trend of my extended time RSI for the IEV as well as the overbought status of Euro
shares on the MACD.

I read today where youth unemployment in Greece is up to 55%. And segments I see on BBC
TV tell me that humanitarian needs are creeping into the deeper suffering countries in the EZ.
You have to watch this very negative wave. To mix a metaphor, the austerian thinkers and
administrators are taking their smoke breaks ever closer to the EZ fuel dump despite the
"no smoking" signs in the area.

Stock Market Quickie...

The rally in the SPX up to a new cyclical high since Jun. has proceeded with a fair degree
of form regularity. It has saw toothed along and every challenge down to the 25 day m/a
has resulted in a bounce off the 25 day or a quick upmove if the 25 day was penetrated to
the downside. Note as well that such penetrations have been shallow. Well, the SPX is
once again down around its 25 day m/a. As well, my extended time MACD is also showing
a challenge to the uptrend in place there. Without a nice upward bounce in the SPX this
week, we may be looking at a rally that is either changing character, or worse, ending.

SPX Chart

Stock Market -- Monthly Chart

Here is a link to the decade long monthly SPX:

A cyclical bull market from Mar. 2009 remains in place. The market is moderately overbought
compared to its 10 mo. m/a. When measured on momentum, the market is also moderately
overbought, and when you check the bottom panel -- stochastic measure -- the market is starting
to approach an overbought level.

Longer run MACD is positive and the thin premium reflects the drag effect of the near bear
market in 2011. Note the slight negative dip to MACD last year.

The SPX has cleared all resistance levels save for the all time peak level recorded in the
latter part of 2007. There is current trend support for the SPX down around the 1400 level.
If the SPX can hold the current trend off the 2009 low, it would take out the all-time high
by Feb. / Mar. 2013. However, The VIX volatility or "fear" index is quite suppressed, and
this indicates a fair degree of complacency in the market. Note that over the past 10 years,
the VIX has not often stayed at the current suppressed level for very long. This suggests that
a price correction may not be that far off and that projected extension of the current uptrend
line may be dubious. VIX

Stock Market -- Daily Chart

The positive run from early June is getting ragged, but it is still intact thanks to the bounce
off the 25 day m/a today. The SPX is not overbought on price momentum in the short run
but is a little overbought on the 40 day RSI and my extended MACD, which as you'll see,
is shaky. SPX Chart

I have also included the 30 yr. Treasury price in the bottom panel of the above link. The SPX
has generated a much better relative return so far this year, but has been smoked by the 30 yr
when you take year end 2010 as a base. You will note how strongly the 30 yr has performed
over the past 18 months even as the economy has continued to expand. I regard the 30 yr as
way overpriced for the true longer term, and have no plans to look at a long side trade until the
bond gets down below 135 (3.50% YTM). There is a large slug of potential equities money in
the Treasury market, but players remain quite cautious on the durability of the US recovery. You
can see that in how well the bond has held up as well as in the continuation of wide credit
quality spreads within the conventional investment grade bond sector and also with ongoing p/e
multiple suppression for the SPX.

News On Jobless Claims, Employment

Two interesting items which helped the stock market today:

Jobless Claims
Unemployment insurance claims for the prior week dropped to 359K. In a recent post (scroll
down), I mentioned jobless claims -- a good weekly leading economic indicator and one which
stocks players watch carefully -- needed to fall from the 380K+ area back down to 360K to
hold the rally. Moreover, I think claims need to stay around 360K, or even better, pierce that
level to the downside to support further gains in stocks. Take a careful look at weekly jobless
claims for 2012 here. Further improvement is something just short of overdue.

Payroll Employment
Back on Jul.6, I posted that payroll jobs growth was about 800K short of the more current and
broader household survey. Details Subsequent reports from BLS dropped the discrepancy to
414K jobs in favor of the household survey, and a new benchmark revision of payroll data
from BLS claims the payroll numbers have been 386K too light over the pasy year. This will
eventually force upward revisions to a number of economic time series when the final benchmark
numbers are officially posted early next year. In the interim, it gives the Obama guys a fresh and
positive talking point toward the election and and the new data helps a little with economic
strategizing and market sentiment in the short run.

Note however, that business remains an extraordinary cheapskate in handing out wage increases
to the rank and file and that resulting poor income growth keeps the economy far more tenuous
than needs be.

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...