Stock Market -- Daily Chart

The SPX has been in a strong, sure footed uptrend  since late Nov. last year. The dips
have been bought aggressively and this has caused the conventional, momentum based
indicators to whipsaw in merciless fashion, all to the benefit of daytraders and buy-and
hold players. The driving premise has been: QE is good for stocks; slow growth keeps
the Fed committed to QE, so a sluggish economy helps the case. There is also the "TINA"
school -- "There Is No Alternative -- a thought which builds off the Fed's ZIRP policy.
Whatever the longer term merits of this strongly Fed policy centered strategy may be, the rally
to new highs is overbought on a number of measures. Even so, since the trend has been
so well drawn, the wiser course at this point for many traders might be to watch the
action of the market against its 10 and 25 day moving averages since the interactions here
have not whipsawed like the conventional indicators. SPX

Stock Market -- Weekly

Fundamentals
The "average stock" is up about 50% since the dark interim period at the height of the US
fiscal fight in 2011 and when the EZ was in heavy crisis mode. The market has blown past my
modestly uptrending weekly cyclical fundamental indicator and 12 month corporate profits,
which are up only about 10% over this interval. The market has even outdone the Fed,
which has let its balance sheet expand by 15% since the late summer of 2011. Also, over
the same period, credit quality spreads between investment grade issues have not narrowed
at all, an uncommon development in an advanced strong cyclical bull market.

The advance in stocks reflects an upward revaluation of the price earnings ratio to reflect
both continued US economic expansion and low inflation. But, this period has not been much
of a sweet spot at all in the economy given the scant progress of profits and but modest
growth which has also had a few shaky moments.

Normally a cyclical bull market turns increasingly risky as short term rates rise, inflation
accelerates and liquidity growth subsides. There is none of that in sight now. The risk
such as it is comes from a strongly advancing market contrasted with an underperforming
economy. The danger here is clear. Rising confidence which is overriding rather mediocre
economic / business performance can evaporate quickly if unpleasant realities intrude.
The shock absorber of strong fundamental performance is simply not there.

Technical
This week I look at the non-capitalization weighted Value Line Arithmetic and the broad NYSE
a/d line. First up is the $VLE

The VLE has made new all time highs in successive years and strongly outperformed the SPX
until mid - 2011. Since then relative performance has been more checquered but when the VLE
has lost its performance edge, the general market has tended to suffer. Note that the VLE
has started to lose relative strength again against the SPX (bottom panel) and that index RSI
and MACD have begun rolling over as well. Also, be advised that this index, as volatile as it
can be, can well take its sweeet time making an interim top and that should stronger economic
data come along , it can reverse positively against the SPX.

Next, let's move on to the NYSE advance / decline line. $NYAD The a/d line remains in a
strong uptrend and has been underscoring the strong nature of the cyclical advance. The a/d
line has recently successfully tested its important 6 wk. m/a. and the broad market is going
to keep on rising as long as the a/d line stays over the 6 wk m/a. Trouble usually does not
start until cumulative breadth gets tangled up with its near term m/a, and when it does, well
that can be a bell ringer. Note as well that the a/d line is running at a hefty premium to its 40
week m/a.

Russia Stocks

Starting back in early Dec. last year I gave the Russian market a little tout. There
was a good trade there, but on Jan. 28 I posted the market was clearly overbought.
However, to my surprise, the market has dogged it since then what with a difficult
early winter economy and an oil price that has basically been flat since year's end
2012. The market did a little better this week on a rebound in the oil price and it
is still oversold. I continue to mull over the prospects for the oil price, so if oil
bounces up some more, I may well miss a corresponding rally in the volatile Russian
stocks until I have more solid bearings around the petroleum market. RSX Etf

China Stocks

There was a long overdue but handsome long side trade in China in the latter part of
2012, but it was cut short early this year. Longer term technicals suggested that the
Shanghai Compositie could be sliding out from underneath a longer run downtrend, but
this was undermined by disappointing economic performance.

China's industrial output did accelerate over the latter part of 2012, but as I mentioned
back on Mar. 8, there was some concern production had ramped up too rapidly relative
to both internal demand and trade. That appears to have been the case particularly as
regards global trade which has been expanding very slowly. As a consequence, the
longer run record of industrial output growth for China still shows a downtrend to be
in place, despite the recent 8.9% reading for production measured yr/yr. China Production

With output growth slowing, the recovering stock market failed to take out resistance and
correction ensued. I have been thinking that China stocks are very reasonably priced even
for 7% real GDP growth, and so I was surprised at the sharpness of the correction and
the very strong focus market players have put on the trend of economic momentum. The
volatility in a still comparatively rapidly expanding economy signals muted confidence
in China's potential going forward. For now, it would appear that players like myself
have to put extra weight on shorter term economic momentum, which is not an easy thing to
do when you are a half a world away such as myself.

I have linked to the S&P China etf -- GXC.These are major companies that allow foreign
investment. This index has been in a volatile uptrend since the autumn of 2011, but note
that formidable resistance has formed up at the 77.5 level. (The Shanghai is in the top panel.)
GXC Chart & Spdr China Fact Sheet

Gold Price -- The New Battlefield

The onset of a bear market has shifted the gold bull / bear battlefield downward from
the $1800 -1550 oz. range to a new range $1550 - 1350. This range could stay in place
for many months to come but may well not given gold's volatility and the speculative
interest in it from both bulls and bears. The metal is bouncing back from a classic
bout of climatic selling that brought it to a very deep short term oversold position. The
vertical nature of the rebound cautions that even if there is decent recovery rally, the
road back will likely include some sharp sell offs.

New resistance up at $1550 ranks as technically formidable. Support at the $1350 level
is far less secure as is secondary support down at $1250 oz.

The gold price has tanked off the 2011 high despite positive monetary indicators, so that
very powerful prop since gold began its run early in the prior decade has been knocked
out. My global industrial output growth indicator is moving up far too slowly to
support an ebullient gold market and as the chart link ahead will show, gold is still
trading at a premium to the oil price, since 13 barrels of oil per ounce of gold is probably
a good longstanding rule of thumb. Gold Chart

The gold monks who toil at the abbey will continue to busy themselves with devising new
bullish scenarios, but a period of dreary sub-par global growth and subdued inflation
pressure which we are living through now is not conducive to a strong market for precious
metals as there are no nasty edges to capture, just the blah outlook instead.

Stock Market -- Weekly

Fundamental
My weekly cyclical fundamental indicator (WCFI) hit a cyclical peak in the latter part
of  Mar. It has been weaker since then, and so it may be noteworthy that the stock market
has adjusted back down to levels seen a month or so ago. The coincident indicator
portion  of the WCFI has been advancing over the past year, but its momentum has been
slight compared to the first three years of recovery. The forward looking component of
the WCFI rose sharply over the late Nov. '12 - late Mar. '13 interval but has been weak
and volatile since reflecting the unsettled readings on jobs loss claims. However, on a
more heavily smoothed basis, the leading economic indicator component of the WCFI
is also around a cyclical high. Even so, the choppy week-to-week action of the WCFI
reduces visibility for the stock market and has induced some edginess among players.

The mild pullback in the market since the Apr. 11 all time high does bring it back
more in line with the evidence of a slowing economy and also goes to somewhat
assuage my concern that the big QE program would drive stocks up willy nilly even if
the tempo of the economy had slowed.

Technical
The weekly chart shows that the cyclical bull market continues to move along. It does
remain extended vs. the 40 week m/a and sits about 7% above the trendline underscoring
advances since the early autumn of 2011. the indicators are deteriorating, and without
another positive whipsaw soon, there will be an intermediate sell signal forthcoming for
the market. SPX Weekly

Stock Market -- Daily Chart

Back on Mar. 10, I projected the market would make an interim top over the latter part
of the month. But, the SPX did not make a short term top until Apr. 11. Even so, the SPX
is right back down around where it was when I wrote the Mar. piece. So, it was not the
worst of calls.

The signature difficulty of the current upleg underway since late Nov. have been the
two positive whipsaws -- one near the end of 2012, and one in late Feb.-- that took the
SPX higher just as it looked as if a correction was about to set in. Those two whipsaws
have told experienced players not to be wise asses about the rally and to respect it.

Now, the SPX did survive a test of the rally uptrend line in place just the other day. But,
the SPX is once again setting up to roll over and because of the prior two wicked whipsaws
one is reluctant to say: "This is it; this is the start of an overdue round of profit taking."
Probably one should wait to see if enough weakness develops to lead the 10 day m/a
below the 25 day m/a before one cautions more vigorously. But, even then, we would
be looking at a market well down from the recent Apr. 11 all time high. No one is going
to clap for you if that happens.

The market has been moving higher really since early Jun. '12, and, it did become strongly
overbought against its 200 day m/a -- rarely a bullish omen. But, as I have feared, it
may be that players feel they have a specific immunity against a material pullback because
of the aggressive QE program by the Fed. As you know, fighting the Fed has not worked
that often in the US particularly when the Fed is being strongly accomodative.

If there is another whipsaw up in the cards, watch carefully to see if the SPX fails to
to take out the recent high of 1593. More ahead from me over the next few days....

Daily SPX

US Dollar -- Please Not Again

Viewed against the major currencies the US dollar has been in a long term decline
ever since then Fed Chair. Volcker was suckered into a strong dollar policy over 1983-
86 following the deep global recession of the early 1980s. The US, Germany and Japan
were supposed to form a three engine complex to pull the globe out of recession, but
Japan and Germany both broke the deal and went their typical mercantilist way. Between
1980 - 85, the dollar nearly doubled in value and the US lost a tremendous amount of
competitive position which it never regained. Long Term US$ Dollar Chart

In the Clinton - Rubin era circa 1995, the US grandly encouraged another strong dollar
era, with the USD this time climbing 50%. This stupid move was also disastrous for the
US competitive position as it paved the way for aggressive mercantilism from China.

A strong dollar favored foreign investment and off-shoring, but it greatly undercut US
export potential, reduced the base of production and led to a downshift of earnings
potential for the US work force.

Over the past decade, the USD again went into sharp decline as players realized the depth
of the erosion in the US trade position and as new Fed chair Bernanke politely attacked
China mercantilism.

The dollar remains in a bear market, but has been range bound over the past five years as
trade fundamentals have improved and as interest in the currency as a safe haven has
increased.

By Its deeds, the US has made it clear that it is not interested in a strong dollar policy and
has no desire to repeat the disasters of the 1980s and 1990s.

Barring another dumb and furious rally in the dollar, the US should see its trade position
gradually improve in this decade on continued rather moderate consumer demand, a shift
in manufacturing to more specialized products, a rebound in hydrocarbon production and
growth potential and further development of new services and technologies. Whether that
is good enough to stabilize our currency remains to be seen. As well, the US will have to
make sure it remains far less tolerant of foreign mercantilism than it has in the past.

Market players, fearful of an unsettled eurozone and stresses that may develop in China
if it does indeed opt to better diversify its economy may continue to eye the dollar as a
prospective safe haven and will be keeping an eye on Japan as it tries to overcome a
punishing long term deflation. A little mild upward pressure on the dollar is no big deal,
but a powerful rally would be most unwelcome at this point as it would ultimately
negatively affect US employment. Thanks, we do not need that.

Oil Price

The elongated volatility of the oil price has provided some nice trades for me over
the past couple of years, but the last 4-5 months of action have proven tougher in that
I have had a couple of long side trades that needed to be cut short with just nickel /
dime profits.

The "bomb Iran" story, a staple of early-in-the-year efforts by pit traders to gin up the
oil price for seasonal support simply did not materialize this year. Netanyahu won a
squeaker in Israel, Obama pushed the critical time for an Iran nuke bomb out to 2014,
and the last round of talks of EU folks with Iran ended sans threats and recriminations.
Finally, the US has been occupied with NK and the battery of threats from "Kim Young
Gun."

So, oil has wound up behaving contra-seasonally, with oil losing positive traction as the
Iran rumor mill fizzled after January and trader concerns shifted to prospects for slower
demand growth from China and a modest safe haven rise in the dollar. Daily Oil

I do not think China's economic performance so far this year has been disappointing as
many apparently have, and the recent strength in the US$ has been nothing to write home
about. Even so, the sharp drop in the price of oil this month calls into question my view
that oil should trade between $85 - $115 bl. this year, and it may be the wiser course
to step back from being as confident as I have been to take a deeper look at oil price
behavior especially since a price below $90 does undercut the mild cyclical uptrend in
place since late 2008. Besides, since oil is just mildly oversold now, patience may not
be a bad thing. Three Yr. Oil Price

Corporate Profits

On a yr/yr basis, my business sales models have improved in recent months from the
low 2-3% range seen around the turn of the year up to the 4-5% through March. The
growth is a little uneven but is volume driven. Pricing power remains muted and my
price / cost model has slipped, particularly for the more basic materials and
manufacturing companies. The recent slippage in business hiring may help some
companies offset reduced pricing power.

From a macro perspective, profits were again subdued in the recent quarter although
the trend month-to -month improved significantly so that March may have bailed out
more than a few performance comparisons for businesses. My expectation for full year
profits is for moderate progress based on an eventual move up in top line growth to 6%
or a little better. To get there, we may need to see a stronger inflation and pricing power.

Revision of production series data by the Fed shows there is a little more slack in the
system than was indicated last year. The new Fed data also show a little faster growth
of productive capacity. This suggests that if the economy does regain more growth
momentum, the eventual development of cost inefficiences will be milder.

Economic / Financial Liquidity Factors

US Economy
Measured yr/yr, my coincident economic indicator set was up just 1%, held down by
further deceleration of real retail sales, weak real take home pay and yr/yr growth of
civilian employment by just 0.9%. Industrial output was the one bright spot and that
was powered by higher electricity generation needed for cold weather. With the further
slowing of retail sales, industrial production could be curtailed in the future if inventory
adjustmetns are needed. Underlying economic purchasing power has declined on slow
employment growth and weak earnings. Consumers are going to need to borrow more this
year and / or drain savings to maintain modest retail sales growth. Home construction is
a bright spot but remains low. The much larger export sales sector has improved modestly
recently, but is not much higher than a year ago. Overall, the economy is sluggish and lacks
balance.

Financial System Liquidity
The Fed continues with its major QE program, and that's a good thing since the broader
measure of financial liquidity or funding has actually declined over the past two months
as the banks have adequate deposits and continue to prefer building capital and liquidity.
Total interest earning assets for the banking system are up a mere 4.4% yr/yr and total
loan demand is up even less at 4.1%. The banking system is drifting back to join
corporate business as a drag factor on real economic progress.

Gold Bear

With today's big sell off, the gold price slipped into bear territory as it is now about 23%
below the all-time high set in Half  2 '11. The sell down took gold below the previously
firm support level in the $1550 - 1555 oz. area and also sank it below important trend
line support of $1525. By my estimate, that takes the safehaven premium down to a still
substantial 29%. Weekly Gold

The gold decline took out secondary support at the $1500 level, leaving the next interesting
support measure down around $1350 oz. Since I never had a firm fundamental handle on why
it went up so high in the first place, I defer to others to explain the recent action with precision.

The gold bugz did get the wind knocked out of them today. There was reason to be cautious
after Goldman Sachs recommended clients short gold earlier in the week, but the severity of
the hit had to be a shock. So now the bugz bull strategy establishment will have to re-tool and
try and wrest the momentum away from the sellers. As the indicators for the GLD ETF show,
the market is strongly oversold in a clearly negative trend. GLD

From a strategy point of view, remember the rule about not trying to catch "falling knives"
and also the rule about working hard to avoid value traps -- that which suddenly looks cheap
but is not. Finally, keep in mind that in a bear market one should think first about selling the
rallies instead of buying the dips and declines. Good luck!

Stock Market Factors

The "Factors" update offers some quick perspective on the market in terms of risk /
return. Stock Market Factors

SPX Panel
The Cyclical bull rolls along. The strong price action this week re-introduces a mild
overbought on short term price momentum and brings the SPX to a major overbought
when seen against its 200 day m/a. The % premium here is presently 10.2. Now the
premium can go higher than 10%, but this has happened rarely and the odds the market
will perform strongly after the SPX does clear the 10% level are only about 25% within
a rough six month time frame. So, it is not a bad time to take stock of your objectives
and, if you are a more balanced trader, keep an eye out for shorting opportunities.

VIX Panel
As the bull market has advanced since the autumn of 2011, volatility expectation has sunk
and investor confidence has risen. The VIX is currently at 12.2. A very low VIX of 10.0
would indicate that market players are not just confident, but are smugly so as back in 2007
before the trouble started. So, the bulls do not yet think they have it nailed but they have it
going in that direction. The VIX can stay low for goodly periods so the trick remains to
look for the sudden upturns that may well warn.

Relative Strength Of The Cyclicals Panel
When the cyclicals outperform, investors are looking for improved profits as the cyclical
companies have the earnings leverage in an economic expansion. The cyclicals relative
strength index has lost its uptrend recently and has been flattish since the end of Jan. Players
have been adding more defensive holdings while staying in the market with the Fed's QE
program operating as the tailwind. I would prefer to see the cyclicals adding to relative
strength.

SPX Vs. Long Treasury
The relative strength of the SPX has edged above resistance, but you can see that some
players are sticking with Treasuries on the basis of an economy that has recently slowed.
This week has brought some resurgence back to stocks, but a failure of stocks to continue to
to outperform the very low yielding Treasury bond would not be a good sign.

Stock Market -- Daily Chart

The cyclical bull market remains in force. The sharp, shorter run uptrend from the Nov.
'12 interim low remains in force, too. The momentum measures of overbought have been
cooling with the very recent flattening of the market around record levels. The minor
price breaks that have been seen since the end of 2012 have turned out to be dips which
quickly found bids. The indicators I have been watching have been faltering but have yet
to yield the breaks that would suggest trouble is finally en route. I have been figuring the
market would already be in correction by now, but rather than say "Oh, it's just around the
corner" I am more prone to inquire about the missed call.

My weekly cyclical fundamental indicator has turned more volatile recently, but is only at
a level consistent with readings from late-Jan. / early Feb. Players have been excusing
the slowing of economic progress, perhaps to give the economy the benefit of the doubt in
view of the continuing strength of the Fed's QE program. Tricky business.

SPX Daily

Gold Price -- More Comment & Some Conjecture

Using a small amount of trading capital, I have been shorting the dips in the gold price
very profitably since Oct. '10. It has been my contention that the Gold price confirmed a
price bubble back in 2011 when it first topped $1,500oz. In my view, the bubble run
started in late 2005 when gold rose above the $500 level. Since you have to allow a
3-4X move up in a price bubble, I put gold up at a top range of $1,500 - 2000, although
I did not hold out a lot of hope for $2,000.

Now is not a good time to short gold since it is oversold, and as discussed in the post
immediately below, the bugz have been successful at staunching declines around well
defined support at $1550oz. I have no interest in going long gold as I will find profitable
and safer trades elsewhere, but if the metal fails to rally further ahead, I would have a
significant interest in shorting it again should it break the $1525 level decisively.

Gold has gone up on a parabolic with the $1900 + level seen in 2011 representing a near
perfect ending to the run. History shows that it can be very difficult to fully resuscitate a
completed parabolic that has moved into correction mode. Here is the longer term chart
for gold. Monthly Gold Price

The parabolic move in gold is longer and less vertical than the 1976-80 parabolic which
came shortly after the gold price was deregulated in the US. Note the initial big rally in
the metal that came later in 1980 after the parabolic up was completed. Note as well the
dramatic fail that took place when the bugz could not ring in a new high. Looking far right
on the chart, you'll see a similar failed rally up to $1800oz. last year. The point here is that
continued rally fails above the current rough $1550 support level could lead to a big
correction as the safehaven premium in gold contracts. Now this is all informed and not
idle conjecture, but it is conjecture nonetheless.

For now, the bugz have to rally gold further off the recent $1550 area of support and hope
enough scary things happen economically and financially to take out formidable resistance at
$1800.

Gold Price

In the 1/28/13 post on the gold price I suggested that the mellow metal could suffer in the
current year. The gist was that continued global economic expansion this year without
a heavy financial crisis environment could lead to a further reduction in gold's crisis or
safehaven premium even though the cyclical and monetary indicators in support of the gold
price could well be positive. Jan. 28 Gold Post

As it turns out, there may have been something to this idea. The bullion price has dropped
about 7% over this period and the current short run read for the global economy is for modest
real output growth and with inflation mild as well. Cyprus gave gold a short term bump, but
the metal  has sold down sharply this week and for now, the safehaven premium has fallen to
about 34% (Check 1/28 post for more).

The gold price now stands down around a critical support level at 1550. It has moved into
oversold territory and is trading right where the gold bugz have been able to get some
positive reversal leverage, although each bounce in price since late summer, 2011 has been
progressively milder. So, price resistance levels have been falling as well, and the gold
price without a fast rescue could well slip into bear territory. Gold Price

Let's see if the bugz come in again on a rescue mission. If I was a gold bull I probably would
not get too upset unless the gold price drops below my longer term trend support line now at
1525. To be charitable, support below that level is down around 1350, and that has yet to
withstand a challenege.

Eurozone Status Check

Measured yr/yr, EZ industrial output has been mildly underwater since a new downturn
accelerated in late 2011. This, coming on top of an incomplete recovery from the 2008 -
2009 deep recession, has resulted in a zone-wide rise of unemployment to the 12% level.
The more recent economic downturn reflects the intense liquidity squeeze imposed by the
ECB in the wake of a deceleration of the broad deposit base and credit growth as the bank
pursued inflation in 2010 which, realistically, had nowhere to go but down, anyway.

The liquidity situation bottomed in the middle of 2011 and has been improving reasonably
steadily since. If left on trend, there should be monetary and broader deposit bases that
are sufficient to underwrite noticeable EZ economic improvement by the latter part of 2013.
There is a risk to this assessment and that is that a liquidity trap is now being observed
reflecting hefty austerity programs in the more troubled countries coupled with regulatory
changes in banking which are forcing banks to allow loans to run off to reduce financial
leverage and build liquidity. Over the past few years, EZ credit outstanding has fallen by
$300 bil. easily (This data does not include deposit and credit info. post the ridiculous
and vengeful official actions brought against Cyprus, actions that could reduce EZ deposits
and shift more of the loan book beyond the EZ.) A better economy should follow the much
stronger liquidity environment, but the aforementioned impediments could stretch out the
process.

The euro area stock market remains nearly 35% below its 2008 peak, and has been in a
broad trading range since mid -2010 when the Greek crisis and the monetary liquidity
squeeze both took hold. IEV Euro 350 Longer Term 

The second IEV chart in the deck compares the IEV with the euro, the German ETF EWG
and the SPX. The IEV has entered a short term downtrend and both it and the EWG are at
risk of violating their respective uptrend courses from mid-2012. The euro has already
given way. The classical cyclical timetable, which interests me, would suggest better
euro area stock performance come this autumn. IEV 2010 -2013

US interest in the EZ is mixed. Some players think they see substantial longer term value
in EZ stocks given the very substantial discount to the 2008 highs, while many other players
see too many impediments to growth. The Cyprus affair is regarded as rank official
stupidity by most senior and successful investment players, myself included.

Economics Quickie

The ISM purchasing managers' manufacturing activity composite for Q1 2013 was positive and
came in just slightly under 53.0. However, if the current large QE program underway is to be
considered worth its salt the ISM mfg. reading needs to move up to the 56 - 57 area for a
good several months. ISM Mfg.

SPX -- Monthly

Here's a link to the longer term SPX with indicators that you can keep or change as you
wish. SPX Monthly

Observations
For the fun of it, the SPX back through 1994 is included. The first bubble started in 1996
and the run up into 2000 is a terrific reminder of just how powerful a real bubble is. I
tend to use 1994 as a base, and from the SPX levels then, the SPX has compounded before
dividends by 7.2% per year compared to net per share of 6.6% So, excluding the bubble
and its echo (2004 - 2007), the market has done very well by my lights. To get back into
bubbly mode -- above the top of the very long term channel dating back to 1946 -- the SPX
would need to move up close to 1700 this year, at which point it would move into hyper-
extended mode again.

At the 1569 level, the SPX is getting rather extended on a cyclical as well as a longer term
basis. The risk in the market has risen sharply since that woeful low back in 3/09. Recall
too, that with the US and the global economy in slower growth modes, it is positively heroic
to project the 9.4% profit growth seen over the 1995 - 2013 era well into the future. Bull or
bear, it seems wise to scale back expectations going forward even recognizing that the bears
and other cautious folk have underestimated the ability of corporate America to wrench
continued gain in profit margin.

The behavior in MACD, notwithstanding its recent strong positive showing, is reminiscent
of well evolved cyclical mode and the 50+ is pretty high for post bubble action. On the plus
side, RSI is in a clear uptrend off the cyclical low and is not yet extended. The bottom
panel of the chart shows a 12 month momentum measure which is strong but is still running
below the "hot" 200 level when the SPX has started to veer toward trouble in the past.

I am seeing more strategists raise their projection for how the SPX will close out 2013. A
rise to the 1650 - 1700 area is gaining in popularity. This range implies an acceleration of
earnings and continued growing  investor confidence the Fed's ZIRP and large QE programs
will win out against the obvious attitudinal and economic headwinds in place. Note as
well that lots of guys out there simply play "extend a trend" which would put the SPX at
1700 at the end of this year off the autumn 2011 base.

30 Yr. Treasury %

Here is the three year weekly chart for the long Treasury yield %: $TYX

The long bond yield is in historically low ground because:
1. The 91 day T-bill is trading near 0% (ZIRP). Heavy anchor here.   
2. Over the past six months, the yr/yr CPI measured monthly has averaged slightly below
   2.0%.
3. The CPI is in a long term downtrend and has become deflation prone. The historical
    320 basis point premium in the CPI over the long Treas. has shrunk considerably as a
     result with this process naturally aided by ongoing ZIRP.
4. Treasury bond and note yields carry a flight to quality discount and there are bids
    under the market from the Fed and retirement funds who need to begin lattering
    maturities to handle upcoming pay out demand as more boomers turn 65.

The 30 yr. Treasury Yield is now working slowly higher because:
1. Industrial commodities prices, which tend to play a major role in determining the long
    T-bond yield's direction in the short term, weakened substantially over much of 2011,
    started basing in 2012, and have drifted modestly higher recently on improved demand.
2. US and global industrial output has undergone a positive degree of acceleration here in
    2013 as major central bank QE programs take hold.

The recent uptrend in the 30 yr. yield is mild and volatile because:
There has been a degree of acceleration in US and global output this year but the momentum
 of both measures is running well below normal levels seen in established economic
expansions. Thus, sensitive materials prices and the long T-bond yield are behaving more
tentatively. A continued acceleration of industrial output would foster higher industrial
commodities prices and likely sharply higher bond yields (and lower bond prices).

S&P 500 New High -- No Big Deal

Today, the SPX closed at a new historic high. Although overbought in the near term,
economic and financial resources are ample enough to support substantially higher
highs over the next couple of years. Not only that, but the market can progress to
significant new highs without a strain on valuation parameters provided the economic
expansion unfolds in way that allows the system to heal further and regain balance and
resilience in the wake of the large 2008 - 09 bust. Business and consumer confidence are
still relatively low, debt leverage is still relatively high, fiscal policy has become
conservative too early, and, finally, the US economy has become deflation prone on a
longer term basis. So, the Fed has to carry the ball here into on- the- ground headwinds
on the reasonable premise that its ZIRP and QE will drag the economy along until it can
clearly progress on its own without the aid of hefty monetary ease. In the wake of the
Great Depression which hit bottom in 1932, it took 14 years of tender ministrations from
the Fed before the economy was more or less fully righted. It should not take quite so
long this time out, but as a student of US economic and financial history, I am not about
to stop fretting now....

On a personal note, there were seven of us kids in my family. Of the four youngest, I was
the only one to survive childhood with this tale to include the loss of a twin. Raised by
utterly grief stricken parents, I wound up fashioning my own way to get along in life. So,
for example, I have been a big risk taker for many years, but the bad shocks monitor
is always on....

Stock Market Breadth

The chart link ahead shows the cumulative a/d line for the NYSE. It makes for some
interesting reading. NYSE Breadth

Note the nice uptrend for the past three years, but note as well that the A/D line is getting
extended once again prior to recent tops. You'll also observe the large premium of the line
over its 200 day m/a -- a warning.

The A/D line and the market tend to falter when cumulative breadth starts to get tangled up
with its 30 day m/a, an obervation that goes well back in time. For now, the A/D line is
still freely rising above the 30 day m/a, which keeps it positive.

I have also included extended time readings for MACD and RSI. Derterioration in these indicators
tend to foreshadow interim tops in breadth and share prices although the lead times can vary.
MACD has just started to roll over, and RSI has lost its its uptrend, but although toppy, has not
broken down yet.

Short term, the envelope has been well pushed.

Stock Market -- Weekly

Fundamentals
The Fed continues to expand its balance sheet rapidly and despite the rapid upward
trajectory of credit extended, it looks like it will still be another 3-4 months before Mr.
Bernanke starts to get more avid pushback from the hawks on the board and some of the
economics staffers as well. The near-death experience of the economic recovery last
year has the inflation hawks off-balance and quiet for now. Aggressive QE creates a
strong tail wind for the market.

My weekly cyclical fundamental indicator has experienced a moderation of its uptrend
in recent weeks but is still heading higher primmarily reflecting stronger employment
indicators.

About Cyprus
Cyprus is a tax haven with banks that form a payments / deposits flow hub. Banks that
specialize in payments / deposit flows must be exceptionally discrete, maintain excess
equity capital and keep low risk loan portfolios. The money is made via hefty fees that
are charged for maintaining high discretion and for allowing funds transfers that require
bankers naturally disinclined to ask probing questions. Risky lending is to be avoided
because funds transfers can and do involve occasional, troubling overdrafts for which
a large capital base is needed to smooth out those little bumps in the road. Leverage up
and make risky loans and you can be dead in a hurry, figuratively if not literally. Little
Cyprus has a bit of leverage here -- to leave what lies beneath staying beneath, so to
speak. Outsiders will need to be discrete in settling the Cyprus fracas.

Technical
Back on Mar. 10, I opined that the stock market would be moving into an intermediate top
over the subsequent two weeks ended Mar. 22. The market has turned flat in the short run,
but remains in a clear uptrend nonetheless. The SPX is overbought on price momentum as
well as on the weekly MACD and RSI indicators. SPX Weekly

Overbought markets reserve the right to get even more overbought, but this baby seems
well along.

It is interesting that as the SPX has approached its historic highs we have seen an outbreak
of coughing and foot shuffling before the bulls finally square up and take out  the old highs.
Since the market can inflict pain for all at critical junctures, a fitting alternative scenario
would be for players to squeeze the shorts into the land of the new high, shout "hooray",
high five each other in the halls, enjoy a few joyous days and then get clobbered by a sell off....

New Home Construction Permits

My long term track record with US housing has been a very good one. Back in late 2001,
when I was still doing investment advisory / consulting on a part time basis, I projected a
long term top in home prices for 2007 based on deteriorating demograhics. The industry
turned mad as the decade progressed and I lost interest. When I saw the totals for new home
construction at the peak over 2006 - 08, I figured there was so much over-capacity in
housing, there would be no recovery until 2011 earliest.

Right now, I think the beginnings of a new boom in housing are still about 7-8 years away
and will largely be reflecting the emergence of Gen. Y (born 1985 -2005 and nearly 80 mil.
strong) as first time buyers. Even then, the money to be made will be more from building
and modernizing homes than from home price appreciation.

Unless there is a powerful surge in immigration, I do not think underlying demand for housing
will exceed 1.7 mil. units a year. (I would welcome an aggressive and sensible program of
accelerated immigration but that is a subject for another time as it is politically fraught).

Prospective homebuyers have cut their leverage and are in better shape on a cash flow basis,
but too many younger people, many saddled with college loan debt, are low on down
payment capability.

Now, building permits have been an excellent leading economic indicator over the years, but
failed to signal properly in the present recovery because the recession hit the entire housing
business so hard. But, a recovery is emerging in the US. Housing Permits I would be
delighted to see permits rise back up to 1.5 mil. annual over the next few years. I think that is
do-able, but I would be careful to contain optimism. After all, the middle class has been
pummeled economically in recent years, and, when you think about it, mortgage finance
capability needs to be re-built.

Inflation Potential -- Shorter Term

As will be shown, the full CPI over the past decade has been heavily influenced by changes
in the price levels of foods and fuels. The boad CPI less food and fuels has been mild
over the past decade and has been in deceleration mode. Shorter run surges and retreats of
the full CPI have largely been determined by the food and fuels components, particularly
petroleum products. CPI Chart

As the chart above shows, a vigorous "V" recovery in production and operating rates starting
in 2009 turned a deflation environment into a sharp cyclical acceleration of inflation pressure
which culminated in a surge in the CPI measured yr/yr up to 3.9% in Sep. 2011. Note the
strong role played by the price of gasoline and the far broader CRB commodities composite
in driving the CPI up well into 2011. Motorfuel / CRB (bottom panel)

The CPI has been in deceleration mode since the autumn of 2011 on slow production growth,
a flattening out of capacity utilization % and a decline of commodites prices including even
petrol fuels. Note however how the seasonally strong surge of gasoline prices has turned the
full CPI back up this year.

I think the chances favor further and cyclical inflation pressure in 2013 on faster production
growth and higher operating rates coupled with a stronger services sector. This projection
is based very heavily on a positive response from the economy to the current major QE
program by the Fed and comes with an additional stipulation that QE if sustained will also
put some stronger financial player interest back into the commodities market.

Now if there is the usual positive economic response to QE 4, an acceleration of inflation
pressure will re-introduce two issues to think about: (1) If inflation does build too quickly,
it will put even more stress on household income, further undercut confidence, and increase
risk for the economy, especially given the low wage growth in evidence and, (2) Pressures
will rise on the Fed to curtail its QE commitment, provided particularly that the CPI,
excluding foods and fuels, moves up toward 2.5% yr/yr which could be a trigger point to
slice the QE program by the Fed's own admission. A couple of things to think about.    

     

Long Term: Inflation vs. Deflation Potential

The best and fastest way to get a handle on longer term inflation potential is to look at
a rolling 10 year record of growth for a broad measure of money and credit funding
instruments and then subtract annual productivity growth potential from it. In the wake
of the great recession, which saw well over $2 tril. of short term debt default or not get
rolled into new debt, the broad measure of financial liquidity growth for the past decade
has dropped to 4.1% annual. Pull out the reasonable assumption of 1.5% annual product-
ivity growth and you get inflation potential of 2.6%. It is no coincidence that inflation has
averaged just 2.2% per annum on a rolling 5 year basis through Feb. '13.

To get annual inflation potential up to 5%, the broad measure of financial liquidity in the
system would have to be about $4 tril. or nearly 26% higher than it is today. Given how
conservative banks remain, such rapid growth in credit demand soon seems rather unlikely.

To get inflation going strongly for a goodly spell requires not just fast money and credit
growth but high rates of resource utilization and a sharply elevated level of wage growth
to sustain it, all of which we saw over the great inflation period of 1965 - 80, which
incidentally was a an era of low productivity growth. Tossing in a major war might also
help get inflation going.

I would argue instead that the US economy has become deflation prone and has been so
for the past 7 - 8 years, commodity driven mini inflation surges notwithstanding. US
real growth has been very scant in real terms, resource utilization has been declining and
business has succeeded in wringing productivity from an employment base that is nearly
flat. On top, the wage in current $ has been coming down (from 3.5% to 2.1% currently).

The Fed has added nearly $2 tril. in credit to the system to re-inflate it since 2008. The
economy is, in turn, still recovering slowly with the $ value of industrial output running
nearly 24% below the long term trend. To add a little excitement to the mix, The US
Gov't is looking to join the states in cutting spending and jobs. Small wonder then that
top notch economists like Paul Krugman and Joe Stiglitz are not just dismayed but are
appalled instead. Can deflation be virtuous in a well leveraged economy such as ours?
Dream on.

The Fed needs to keep plugging away until the economy takes up more of the capital
slack in the system and shows itself as able to sustain growth on dramatically more
limited help from the Fed.

Up next: shorter term inflation potential... 

Economic & Profits Indicators

Weekly Leading Economic Indicators
The weeklies I follow moved up substantially over the Jun. '12 / Jan. '13 period, although
there was unusual volatility involving jobless claims in the wake of Hurricane Sandy. The
weeklies have flattened out since Feb., but there has been no break down of trend yet. The
pattern still suggests better economic growth through April.

Monthly Coincident Indicators
I use a combine of retail sales, production, the real after tax wage and jobs growth all
measured yr/yr to derive my coincident indicator. On this measure, 3.0% is a good
number and would indicate the economy is or can hum along nicely. Not so, recently.
For Feb., the reading was a low +1.1% and reveals a growing imbalance between sales
and production on the one hand and the income components on the other. The data is lousy
and suggests that consumers must continue to dip into savings and tap borrowing to sustain
spending. With gasoline prices dipping some here in Mar., the heavy pressure on the real
after tax wage may ease up some. It is fair to say that my view may be conservative since
consumers do have stronger borrowing power now but it is also fair to say that pressure on
real personal income will, if sustained for a while, eventually pull down consumer spending.

Profits Indicators
Stronger sales and industrial output in Feb. brought my yr/yr measure of business sales up
to nearly 4%. The price / cost ratio was slightly in favor of cost, so there could still be
companies experiencing profit margin pressures. Feb. also saw some currency translation
penalties on a stronger US$. On balance, profits were a bit lower going into Mar., but it
must be said  recent higher sales and production numbers still hold out promise for
improved quarterly earnings yr/yr.

Commodites

Back in late Jan. '13, I mentioned that a downtrending CRB commodites composite was
rallying up to trend resistance. I did not forecast it would swing through to the upside and
it did not. To my surprise, that failure did not trigger a strong negative response, either.
Players seem interested in seeing how much widespread central bank QE programs might
spur faster global growth.

As discussed just below in the post on global economic supply and demand, the global
economy, following a steep "V" shaped economic recovery over 2009-10, has settled into
a slow growth mode, with production growth only a little better than half as fast as that
seen from 2003 through spring 2008, when the CRB more than doubled from 230 to a lofty,
bubbly 480. This period featured strong economic growth by China, the major global
buyer of commodities, and aggressive inventory carry policy, as China business binged on
FIFO accounting and large cash inventory profits. China joined the other major economic
powers during the 2010 - 2012 recovery period as it too experienced decelerating growth
and had to struggle against over-inventorying in a sluggish global trade environment.
Commodities prices, after a strong rebound from late 2008 toward mid-2011, have fallen
about 20%.

The CRB chart does show an index value support level of 290 which was violated only
briefly in mid-2012. $CRB Weekly  It could be important to note that my long term chart
dating back to 1932 has trend support right around the 290 level for much of this year.

I did happen to catch the 6/12-9/12 lift in the CRB nicely, and with broadscale QE in
place, I am expecting there could be a trade worthy +20% pop in the index during the year.

Just In The Nick Of Time

The very broad measure of US business sales turned down for the month of Jan. and the
level of total business inventories shot up. That is classic early bad news. Viewed yr/yr,
business sales were up 2.9% in current $ and about 1.3% real. The Fed damn near lost
its gamble by holding off on further QE for a good 15 months. Fortunately, retail sales
did pick up strongly in Feb. and accelerated back up to 4.7% yr/yr, partly reflecting
strong, but temporary income growth near the end of 2012. My forward looking economic
indicators do suggest a couple of months of stronger business ahead, particularly in view
of the sharp recent improvement in goods and services new order rates from the purchasing
managers' reports. However, my weekly indicators have been on the flat side since late
Jan., so we need to see more positive follow through here.

Now, the broad business sales report for Jan. was a negative indicator for earnings
momentum. We'll get a more current reading on this score from Feb. production and inflation
data out soon. Through Jan. there was low production growth yr/yr and a continuing
deceleration of pricing power.

It is perhaps noteworthy that the large pick-up in retail sales reported today was a "yawner"
for the stock market. Experienced traders know that retail sales is a volatile series, but it
also shows that a good number may have been needed to hold the market after the recent
strong run-up.

Stock Market -- Daily & Weekly

Daily
Back on Feb. 25 and Mar.5 I discussed the decay of key indicators and how evidence was
accumulating that the market was approaching roll-over. I also stressed there could be a
positive whipsaw which would cream the shorts such as happened near the very end of 2012.
Well, we got the whipsaw up on light volume, which equals a clear short squeeze of traders
who, seeing the SPX was approaching prior record levels, figured they could catch a pull back
as the SPX encountered major long term resistance. A breakout last week above the prior
cyclical high of SPX 1531 on expanded volume would have been more comforting for the
bulls, but may still have left the issue of taking out the historic highs unresolved. So we are
left with an overbought market pushing to take out the old highs. SPX Daily

Weekly
The weekly SPX shows the market in a strong but maturing uptrend from the darker days of
autumn, 2011. Once again, the SPX has opened a large premium of 8.6% over its 40 wk m/a
and is overbought on weekly RSI and MACD. SPX Weekly

Note that the 30 yr. T-bond yield is in the top panel of the chart. It has worked well as an
indicator of economic momentum both present and short term future. The labored but still
substantial 75 basis point move up in yield since last summer when the Fed suggested new QE
would be on the way continues to suggest a modest eventual re-acceleration in the pace of
economic recovery, an eventuality to be welcomed, but one which the stock market has already
mostly discounted for now.

The technicals tell me an intermediate term top is out ahead over the next week or two, but one
has to realize that with this large, still open ended QE program in place, players may elect to
chase the market up until the Fed gets concerned that rational exuberance is beginning to turn
giddy. Make no mistake here. There are guys in this market who plan to run with the Fed even if
they get edgy about the place of the market against the economy.

Global Economic Supply & Demand

The global economy remains in expansion mode. That's the good news. The bad news is that
the deceleration in the rate of growth in evidence since mid-2010 remains intact on a trend
basis. Wait, it gets worse. The global economy has downshifted to a sub-normal and modest
rate of growth. Instead of 4-5% yr/yr production growth which characterized previous ongoing
expansions, we have production growth that has slipped to 2.5 - 3.0%. The global operating
rate has eased and commodities pricing has followed suit as resources are hardly strained
at the low rate of growth. There was some pick-up in the pace of production growth near
the end of 2012, but it has not been enough to reverse the continuing downtrend in momentum.
Major sectors -- the US, Eurozone, China and Japan have all contributed to the slowdown
from the heady early recovery phase of 2010. Moreover, there has been additional pressure
on the commodities markets from financial players discouraged by the slow pace of growth.

The US has finally turned stronger recently, but Euroland continues to struggle while China
is getting a subpar bang for its buck as property price speculation has revived. Japan continues
to clear the decks for an attempt to end its lengthy and debilitating deflation.

After a powerful 23% surge in the first 18 odd months, world trade measured yr/yr has settled
down into a desultory 2-3% range. This has naturally set off fears of  "currency wars" as
countries adopt accomodative monetary policies to make exports more attractive. Such could
eventually happen if these policies of greater ease fail to stimulate local economies and, in
turn, trade demand. Right now, the data show that slow growth is holding on a global basis.

As I read it, the globe is far from overheating and running the risk of ushering in a cyclical
acceleration of inflation. But, matters can change here if we begin to see some pick-up in
the growth of major economies.

For more info, check out CPB Netherlands global trade and production monitor and the global
PMI summary from JP Morgan  / Markit.

Gold -- Slip Out The Back, Jack

Upset in offshore economies, a more financially settled US and the continuing and major
rise in US oil output has stabilized the US dollar and even allowed for a slight rise from
historically low levels. Equities players who have been hiding in gold have been gradually
migrating back to stocks. The rotation has accelerated in popularity recently and is getting
extended. Stocks vs Gold

Stock Market / Economy #3

My argument is recent weeks is that The economy is well due to show stronger economic
data lest the rally in the market turns into just an eventually hollow play on the Fed's QE 4
program. Well economic activity data from US purchasing managers in recent days shows
a firming up in both manufacturing and services including especially new orders. On a
combined, unweighted basis, my US new orders index jumped to 57.0 in Feb. This is a
healthy reading and the strongest since Feb. 2012. Now, reflecting the timing of QE
movements by the Fed, the economy has tended to be strongest in the 4th Q / 1st Q
sequence periods of this recovery. Q4 '12 was a dud in view of the extended tardiness of
Fed liquidity policy implementation, so it was important to see some positive flow through
here in early 2013 in response to QE 4. I also liked the snapback in new orders for
non-defense capital goods which was recently reported.

Now, it may well be the economy will lose some positive momentum as it moves into Q 2
'13, but it was important to see the reaction to QE 4 and to realize that Bernanke intends to
stay with it in the months just ahead.

Based on today's strong positive action, the SPX has started to edge away from seeing the
indicators roll over to signal a correction. But, it is an overbought and extended market
and must build energetically off today's lift to develop a clear positive whipsaw that will
shamelessly rout the shorts. SPX

China Note

As discussed back in Dec. '12 and in early Jan. I argued that a recovery in the Shanghai
stock market was well overdue based on an easy money policy and the fact that the
economy had started to expand again. Following a super fast run-up that kicked off in
early Dec. '12, the market went nearly vertical until mid-Feb when word started to get
around that the economy was slowing. Then, another body blow came today when the
cabinet leaders imposed new restrictions on real estate investments including higher
down payments and capital gains taxes on sales of a variety of properties. Real estate
equities tumbled and pulled the market down. Moreover, since the Chinese use the
equities market as a way to try and build capital to play in real estate, speculators were
forced to take some money off the table.

Measured yr/yr, China's money M-2 has increased by more than 20%. No "pushing on a
string" here. The economy has responded positively and the large block of excess liquidity
has been finding its way right into the property markets. The official data on the economy,
as suspect as it may be, show that the Peoples Bank has been providing liquidity well in
excess of the needs of the real economy for at least a decade. The authorities have been
playing "catch up" with year after year of new regs to contain wild cat real esate markets.
Since the PBOC has been a steady fount of excess liquidity, the authorities, who are pressed
to provide housing for a fast growing work force, have obviously allowed the central bank
vast leeway to fund real estate development whether silly (the "ghost cities") or sensible.

The Shanghai market was overbought and due for a correction which it is getting now.
The risks to the market concern whether the authorities are dead serious this time about
curtailing real estate speculation, and more conventionally, whether China's recent ramp
up in output was a little strong relative to sustainable export demand.

The real estate game as funded by excess liquidity allows the authorities to create a small
army of mandarin buddy tycoons as well as fund needed development. So, it may be that the
new chiefs and the PBOC may stay with aggressive monetary policy until it finally shows
up in the inflation rate.

In the meantime, it is early to tell whether China over-ramped production for the short run.

My view of the Shanghai remains that it can trade up to 2700 if the economy can maintain
real economic growth in the 7% per year range. Obviously, getting there may not be a smooth
ride. Shanghai Composite

Stock Market -- Monthly

The cyclical bull market running from 3/09 continues to roll on. The SPX monthly chart
(linked to below) also shows the SPX is getting overbought against its 9 mo. m/a as well
as on a monthly stochastic measure. Market momentum has been decelerating as the advance
has moved along, with this development being typical of a cyclical upmove that is no longer
fresh. The market is extended on the price band up from mid-2011, but the momentum
measure is well under levels that would signify a blow-off top. SPX Monthly

I do not ascribe great significance to the fact that the SPX has been closing in on its previous
all-time peak. My argument for several years has been that the US economy has the capital
resources in place to see the economy advance for another few years. It has been slow
going, and particularly frustrating since business has opted to continue to mal-distribute
income generated. The Fed's periodic experiments to curtail QE have slowed progress and
now fiscal policy seems to be set on putting further hurdles in place with new austerity
measures. Economic risk is higher than normal now, but no recession is currently indicated.

the Fed has a strong QE program underway since this autumn and US economic history clearly
suggests that economic expansion, now very tepid, should re-accelerate soon, thus paving the
way for further advances in the SPX as the year wears on. I am presently not comfortable that
current QE has not already spirited the broad economy and would like to see more positive data
soon. I have argued my case for an uninteresting market based solely on QE without positive
economic follow-through.

Investor confidence, as measured by a recently expanding p/e ratio, has been on the rise based
on QE, but remains significantly below a level that would reflect solid but hardly exuberant
confidence. With QE and room for the economy to grow without serious inflation pressure,
the SPX should be trading in a range 1650 - 1700 with $100 per share earning power in the
can.

Oil Price

Longer Term
The oil price has not been able to hold above the downtrend line set by connecting the 2008
bubble top and the 2011 Libya coup top. The cyclical uptrend from the late 2008 bottom was
broken in 2011 effectively ending the cyclical price recovery story, at least for the time being.
WTIC 5 Year Chart Over the past nearly two years, there has been a narrowing trading range
market which has presented  both long and short trading opportunites but in an environment
that has grown more tame with time. This is not atypical post price bubble behavior, especially
for the oil market.

Shorter Term
I have done alright trading the oil price over past couple of years, and even though the market's
movements have grown less dramatic, I do have a keen interest in oil this year, as I have been
thinking there would be more pressure from NATO and Israel to deal with the Iranian nuclear
program in 2013. We are, however, off to an inauspicious start so far. Israeli voters have
slapped Bibi around pretty well and Obama has put up Chuck Hagel as Defense Sec. Chuck has
little patience with the Israeli political lobby in the US, is critical of US military adventures in
the Mid-east and is aware of the risks in a military confrontation with Iran. Nevertheless, reports
do indicate Iran is getting ever closer to turning out bomb grade nuclear material, and, even if
neither the US or Israel opt to try and take out much of Iran's program, there will be tough talk
after the UN offers a compromise, talk that is tough enough to get the oil traders interested in
pushing up the oil price. Moreover, the war in Syria continues to turn more violent with
widening but still moderate spillover.

The oil price is at a periodic seasonal low point with refinery changeover to warmer weather
gasoline blends winding up. Predicting bombing runs on Iran has been a staple of trader tactics
for nearly a decade, and the boyz like to gear up the buzz at the end of each Feb. With the oil
market set to move into a seasonally strong period, it might be worthwhile to see how all the
market players and pundits may try and "amp" it. WTIC The chart indicators say it is still a
bit early, so keep an eye out if this is a market that interests you.

Stock Market -- Warning Flags Short Term

The stock market can still whipsaw to the upside as it did in late 2012, but evidence that
it could well be rolling over is accumulating. SPX I prefer the weekly chart, but since it
was a bit tardy with signals over the last half of 2012, I am watching the daily chart now
and will post  the weekly and monthly views at week's end. I should mention that my
weekly cyclical fundamental indicator has been edging lower as February has proceeded.

Stock Market / Economy -- #2

This post can be tacked on to the 2/15 entry (scroll down) which was a comment that
indicated the US economy should re-accelerate quickly in view of the strong, positve action
of the stock market over the past 8 months or else a fundamental disconnect between the
market and the economy will develope.

My coincident economic indicator, which pools sales, production, jobs and income
growth measured yr/yr, was a lowly +1.2% for Jan. The indicator does include an
adjustment for the restoration of the payroll tax which does not affect the wage rate but
does reduce take-home pay. My business sales growth measure for Jan. was +3.7% yr/yr
and reflected both low volume and pricing growth. Since it is tough for companies to
maintain profit margins in this sort of slow growth environment without additional cost
cutting that could hit jobs, fundamental business risk is being elevated.

In the US rare are the times when low short rates and a large, fresh injection of liquidity
fails to stimulate a stronger economy. I think a re - acceleration of growth needs to occur
right quick or we can open a debate about whether fiscal policy is now too restrictive in
an era of above normal unemployment coupled with income inequality / mal-distribution.

In my reading of recent weeks, I note a number people are bullish on stocks because of QE
4 and also do not seem to mind that much that the economy has been so sluggish. The theme
seems to be that since the Fed is so easy and desires higher asset values that players simply
have no recourse but to be in the equities game on the long side. It's easy to talk that way
when the market is on the rise and other portfolio managers are buying and threatening to
leave one behind at the station and, since faster business growth is not yet clearly overdue,
the "simply go with the Fed" pundits seem to be the wise ones. And then, there are the
brazen guys who may be going along just because a run up is a run up, smart or not.

My point is that if QE 4 is a fail as far as faster growth is concerned, we have a disconfirm
of the normal and perhaps a very different ball game then we have seen for quite some time.
I am hoping we do not get the fail.

Stock Market -- Short Term

With yesterday's release of the 1/13 FOMC policy meeting notes, the Fed poured a full
cup of uncertainty into the punchbowl (See the 2/20 post just below). It came as news to
an overbought, extended stock market which was experiencing momentum loss anyway. So,
traders have lined up to book profits after an extended positive run since early, Jun. '12.
The SPX has broken below its 10 and 25 day moving averages although the latter two have
yet to roll over. My extended time MACD which had clear sailing since the end of Nov. '12
is still positive, but it is operating on a wing and a prayer now. In the upcoming SPX chart link
I also show the money flow index (MFI), a price and volume based relative strength index.
One use for the MFI is when it begins to trend down ahead of the market, especially if it
is from an uptrend that made an overbought reading. SPX With MACD & MFI

I also have linked to a five panel chart that shows the SPX with some risk measures.
SPX & Indicators The SPX portion of the chart shows the market against its 200 day m/a.
It reached a nearly 9% premium just the other day at 1530. That sort of premium represents
a significant overbought. The top panel of the chart shows the VIX or volatility index.
Readings down around 10 signify a confident, complacent market. You'll need to see whether
the VIX moves up further to clear 20, as that would warn of a correction. I would also call
your attention that price corrections which begin off a low VIX / high confidence reading
can get nasty. The fourth panel down measures the relative strength of the SP 500 ETF vs.
the long Treasury price. It is toppy at resistance in the 1.05 area and reveals a possible
transition to "risk off" mode by equities players. The bottom panel of the chart shows the
relative strength of cyclicals against the SPX. The clear uptrend here which signals growing
confidence in the earnings outlook is now being challenged via the Fed's new caution about
the future of QE 4.

The Fed: Let's Try For The Best Of Both Worlds

Minutes of the late Jan. FOMC meeting show a Fed planning to keep the large QE program
going, but in deference to the inflation hawks, plans are afoot to look over alternatives
which feature possible modifications that could wind up reducing the $ volume of QE.
Has the Board lost its collective nerve? Well, not quite yet as I will endeavor to point out.
First, let me say uneqivocally that I regard this kind of ambivalence as bullshit. The
instruments the Fed has at its disposals are large hammers and not the tools one could use to
fine tune anything. You either need the bigger hammer or you do not.

The game here as I see it is that the Fed desires to push QE 4 along but is afraid that strong
liquidity flow into the financial system could weaken the dollar and set off hefty speculation
by financial types in the oil and commodities markets. I doubt the Fed stays up late nights
worrying about what the prices of gold and silver might do except in so far as rallies in
PMs  might re-inforce the speculation in oil and commodities. The Fed's concern here is that
a run-up in commodites will accelerate inflation and pinch real incomes which are already
under pressure from the recent increase in the payroll tax. By crying wolf as they allow the
beast to roam, the FOMC hopes to keep folks from running up the prices in the oil / fuels
complex via concern that the Fed may curtail QE and leave the guyz with unsustainably long
speculative positions. The Fed has spooked the PM market by adding strings to the QE $
program, but oil and gasoline players were more nervy and so the FOMC has now trotted out
its QE curtailment in "potentcy" as Aquinas might have said. This could be clever stuff as
long as the Fed does not have to cry wolf but rarely.

I see the progress the economy has made off its lows in 2009, but I am not yet convinced
economic expansion has reached self sustain mode. therefore, I am still happy to see the Fed
with a robust QE program.

The Fed has punished the gold players since latter 2012: GLD Gold Trust ( Yes, a big
test of support could lie ahead).
 

Stock Market -- Weekly

Technical
This week I return to the broad, unweighted Vale Line -A index and the NYSE advance -
decline line. I use these two measures in tandem as a sort of informal model of the stock
market.

First up is the Value Line 1700 + issues chart. $VLE  By this measure, the market is trading
at an all-time high. Using the Sep. 2011 low, my trend work suggests this market is over-
extended on the upside for the first time since the spring of last year. No red light here, but an
amber warning signal. The VLE is also overbought on RSI and MACD, and the weekly
price momentum indicator is just coming off an overbought +20%. The market is on a rising
trend, but this is a very mature rally.

Next we turn to the NYSE weekly A/D line. $NYAD The chart includes the VLE in the top
panel. Here again, we have an uptrend in breadth which is also making new highs. We also
have an overextended market reading and overbought indications for stochastic RSI (momentum)
and plain RSI. The stock market when rising tends to start to have difficulties when the
weekly A/D line begins to get tangled with its own 6 week moving average. It is running free and
clear above the 6 m/a now, and a toppy suggestion is not likely to come unless the A/D line
starts to break down against  its 6 wk. m/a. Keep this in mind.

Fundamentals
The Fed remains on a relatively vigorous QE program, with the QE trend remaining strongly
positive after a slow start last autumn. The weekly cyclical fundamental indicator has eased off
modestly in the past couple of weeks as sharp progress in the reduction of new unemployment
claims and in sensitive materials prices has ebbed. Continuing progress in stocks in the past
few weeks represents a divergence to the WCFI, but note as well that stock price momentum
has started to slow.

Stock Market / Economy

The rally in the market to a new cyclical high over the past seven months primarily reflects
the expectation that substantial new QE by the Fed would eventually translate into faster
business sales and earnings growth. Now the QE4 program of liquidity infusion did not
get going until early Nov. 2012. In turn, my weekly cyclical fundamental index (WCFI)
 -- a forward looking measure as far as the economy is concerned -- began to recover in
June. On balance, the advance in the stock market has mirrored the WCFI, but the economy
has yet to confirm the WCFI with an acceleration in growth. I have not been so concerned
with this issue because I figured that since QE 4 did not start in earnest until early Nov., it
would be best to tack on a 3-4  month lead time to the unofficial onset of QE before looking
for faster economic progress. Well, we are there now, and it is fair to look for the economy to
start performing better PDQ (quickly).

Sales and production data for Jan. '13 were not good, and it appears that the business
inventory sales / ratio is running a little higher than earlier in the recovery. Moreover,
US trade data for Dec. '12 showed both imports and exports to be flat on an extended basis.
And, to cap off matters, the WCFI has started to flatten out as well in recent weeks following
a strong initial start (Confirms the recent loss of momentum in stocks).

I do not find the stock market at all interesting as a long unless we not only see business sales
pick up soon, but get on a track that would begin to lift US sales out of the 3 - 4% pattern we
have seen for months. For me, it is unwise to bother putting capital at risk for more than a
short term trade unless I think I can earn a 10% return per annum at the minimum. The
prospect of 3 - 4% top line growth for US business is not likely to support the return hurdle
I use. The SP 500 is trading around 15X 12 month earnings and a slow struggle, modest growth
muddle - through is not going to be good enough.

The US economy needs to start performing pronto.

Weekly SPX Chart

Strategists Warn On Bonds

Way back in 1981, I was SVP and chief investment officer for NYC based and since long
gone Irving Trust (1 Wall St.). Relative to our size, the trust unit was among the biggest
bond buyers in the US. Sentiment was so bearish, I used to get the occasional phone
call from an economist on Fed Chairman Volcker's personal staff inquiring about my
job standing and whether I still liked the bond market. My stock answer was that I was on
tenuous ground but still a buyer as bonds were 1) yielding more than most companies
earned on their equity and 2) with a blended bond portfolio, we could earn out our clients'
capital inside of five years (There were call protected corporates available for 18%). It
was not the last time I faced career risk in buying bonds, but it was the most memorable.

The bull market in bonds was one of the greatest and most durable in history and also one
of the easiest to trade ever known -- far easier to trade than stocks or currencies or just
about anytrhing else. It was simply like shooting fish in a barrel.

looking at the very, very long term for bonds, it is easy to note that yields are at or near
historically low levels, and it is hardly difficult to wisely surmise that yields will not
stay so low forever. So,what to watch for.

From a finance perspective, bond yields have had two anchors: 1) a long term decline in
short term Treasury yields, and 2), a long term deceleration of inflation. A lengthy bull
market in bonds has  instilled such investor confidence that the "spread" between the 30 yr.
Treasury yield and the consumer price index measured yr/yr has shrunk dramatically.

The US 91 day T-bill now yields 0.07%. Even with economic recovery, the 36 month
centered CPI is but 2.3%. With low inflation and the Fed's ZIRP policy on the Fed Funds
Rate (FFR%), it makes perfect sense for bond yields to be low.

Now, despite an achingly slow path, the US economy is moving toward more normal
bounds and is very gradually recovering the ability to self sustain. It can still certainly
backslide, but within the next year or two, economic expansion may be stable enough
for the Fed to not only have curtailed liquidity infusions but to raise short term interest
rates. Ending ZIRP will send a shudder to the bond market, and yields might be
expected to rise dispropotionately to the initial moves up in the FFR%. as bond players
assume there will be more upside to the FFR% over time. This series of events will be
a strong bear signal for bonds at least on a cyclical basis.

But, rest assured, the near collapse of the financial system and the damage to the economy
that came with the near economic depression of 2008 - 2009 created great caution that is
only slowly dissipating and which can be set back by premature Fed tightening, stepped up
fiscal austerity or the continued punishment of the wage earner.

In the meantime, I will be watching my favorite standbys -- the direction of industrial
commodities prices and the 6 mo. % momentum of industrial production.

Financial System Liquidity

1) My broad measure of credit driven liquidity or bank funding capacity is continuing to
show accelerated growth and is now up 6.8% yr/yr. This is good news for the economy
and it is also nice to see that all major funding categories are finally on the rise. The basic
M-1 money supply is still contributing to broader liquidity growth, but it is counting for
proportionally less as time moves on.

2) Banking system total interest earning assets are up about 6% yr/yr, the minimum rate
I would like to see to sustain economic expansion. The banking system's loan book is up
about 5%, held back by continued ever so modest expansion of the real estate book as
housing activity and real estate development remain well below pre - recession levels
and as banks concentrate on booking fees for mortgage refinancing and portfolio quality
upgrading.

3) Fed Bank Credit has been expanding rapidly in recent months via the new QE program,
but assets on the Fed's book are up but 2.9% yr/yr. Since broad business sales growth rose
only 3 - 4% over the past year, the slow pace of QE measured on a 12 month basis did the
economy no favors. The practically wise course for the Fed would be to stick with the
now more rapid QE program until business and private sector credit demand strengthen
and confidence increases to levels which can allow self - sustaining economic growth.

4) Recently, the annual growth of broad credit driven liquidity did exceed the advance in
business sales measured yr/yr, thus allowing liquidity to flow beyond the needs of the
real economy and primarily into equities. This flow of liquidity was last seen in late 2009
and is a measure of how tight the banking system has been in extending credit to the private
sector. Excess liquidity relative to real economic demand only helps stocks when investor
confidence is reasonably strong which it has been since mid - 2012 when the Fed first
signaled new QE. Folks have been happy to buy stocks on the premise that major new QE
from the Fed will lead to faster business growth. But, such must begin to unfold soon to
keep confidence levels up.

5) Money market fund (MMF) balances were drawn down heavily from mid - 2009 through
2011 as money flowed into the capital markets with some also finding its way into the
purchase of goods and services. Since the end of 2011, fund balances have remained
fairly steady even with scant returns on MMFs. If fund participants have invested or spent
their discretionary cash, future moves in the capital markets are more likely to remain
strongly rotational.

Stock Market Factors

The SPX closed out today at a new cyclical high to confirm the uptrend. The market is
moderately overbought against the 25 day m/a as well as against the 200 day m/a. The
SPX stands 8.2% above the 200 day m/a. Your careful attention is required when the SPX
goes to a 10% premium to its 200 m/a. The market remains extended in price compared
to its price channel up from Nov. '12. SPX And Indicators

The top panel shows the VIX or volatility index. Traders often use the VIX to measure fear
and complacency in the market. You can peg an uptrend in the market off the late Sep. 2011
interim low through the present and note that the VIX has been trending down over this period
suggesting rising confidence. When the VIX falls to a reading of 10.0, investors are seen as
smugly complacent. The current reading is now a low 13.2. When the VIX rises, players are
thought to be growing fearful. When the VIX crosses 20.0 on the way up, you should take note
as well.

My advisory / polling sentiment indicator is excessively bullish at a reading of 65.0. Over
the last couple of weeks. the index has moved up from the mid - 50s to a range of 61.0 - 63.5.
Opinion is indeed starting to warn of optimism that is cruising toward the fringe of exuberance.

The first of the bottom panels in the chart compares the relative strength of the SPX etf to the
long Treasury. Rising strength indicates players are in "risk on mode". This ratio is again up
to the substantial resistance levels seen back in 2011. No reason the ratio cannot motor up
through resistance, but good reason to know we are there now.

The final lower panel looks at the relative strength of cyclicals against the broad market and
is a good gauge of investor opinion regarding SPX earnings potential. This is an important
measure because: 1) earnings leverage resides with the cyclicals; and 2) Players like relative
strength in earnings when structuring portfolios. The uneven uptrend in the ratio shows how
carefully investors are weighing earnings potential this year.
.....................................................................................................................................................
We in the New York area are experiencing our fourth annual "Storm Of The Century", this
time in the form of a blizzard tabbed as "Nemo"... Hope the power stays on, but if not, the
next post will be a few days out.

Stock Market -- Daily Chart

The market rally, which has been humming along since mid - Nov. has hit overhead
resistance on the SPX just under the 1515 level. The market is working off a short term
overbought condition and has yet to move into a situation which would generate strong
warning signals that a significant correction may be at hand. The SPX is mildly extended
on a three month price channel basis now bounded by 1450 - 1490 and could fall to test
the 1450 - 1460 area in the short run without violating the base uptrend line in place since
mid - Nov. Since the short term seasonals call for weakness in Feb., and since a nine
month cycle price low is due this month, you may want to switch off from cruise control to
manual for a spell if you have been coasting mentally through the recent advance. SPX Daily

Global Economic Growth Momentum

Global real growth momentum tends to decelerate as an economic recovery gains in maturity.
Boom / bust indicators show powerful recovery momentum surges in both 2009 and 2010,
but growth did decelerate persistently and substantially from there when measured yr/yr and
seemed destined to start courting contraction as late as Jul. 2012. Global PMI

The global leading indicator, based on new business order flows and sensitive materials
prices, turned more positive in Aug. of last year. Its momentum suggests an end to the
deceleration of real growth, but the pick up in momentum so far has been modest and needs
to firm up further to support the profits growth acceleration which is currently being
discounted by the world's major stock markets. Moreover, with a number of countries now
employing QE programs by their central banks, global demand should strengthen enough to
support a  revival of trade to avoid the development of conflicts centered around
accusations of deliberate currency devaluation which can ultimately undermine economic
stability. A substantial re-acceleration of global trade is needed as an important safety
valve in the economic growth equation for 2013.

Commodities -- Important Resistance level Ahead

It has been my view that with broadscale central bank QE in place, the global economy
should soon experience a reversal in growth momentum from negative to positive. In
2008, the CRB Commodities Index experienced a price bubble top of near 475 before
crashing to long term support around the 200 level in early 2009. There was a strong
recovery out into 2011, but the CRB has languished since then as China, the major
commodities consumer, experienced a sharp deceleration of growth. With Beijing now
showing better production numbers, the CRB has been drifting higher again recently,
and at 305, is set to challenge the five year downtrend line in place since the 2008 top.

Index indicators for the CRB show the index is slowly turning positive, so speculation
about whether it can take out the longer run downtrend is not idle. CRB Index Chart

A break above the downtrend does not by itself imply a new longer term advance may be
in store. Commodities are too volatile for that. Moreover, the CRB would have to take out
the 370 level interim high set in Apr. 2011 to solidify the bull case.

The 320 line on the chart does reflect my judgment that 320 represents minimal long term
fair value for the index based on a macro view of the curve of production costs. It would
be disappointing not to see the CRB hit the 320 level this year especially since continued
global economic growth should be sufficient to wipe out the small amount of excess
commodities production capacity which is still apparent.

US Monetary Policy -- Looking Ahead

I keep a carefully drawn chart of Fed Bank Credit. Since the Fed first moderated QE in late
2008, they have worked hard to keep the flow of credit within a $250 bil. band. At the
present rate of expansion, Fed Credit will exceed the top of the growth band near mid -
2013. They may just allow the flow of liquidity to go  right on and exceed the top of
the band by a handsome margin, but chances are that if the economy is expanding and the
unemployment rate is coming down, more of the voting governors are going to take issue
with the current powerful trend up in credit flow and there will be a stronger voice behind
the idea of scaling down but not eliminating the QE program. FBC Chart (PDF p.7) 

This very possible surge of concern about Fed expansiveness is not a done deal, but it is
a contingency for equities and bond investors as well as currency traders that needs to be
kept in mind.