Stock Market Overview

Fundamentals
Primary: Positive but starting to fade. Easy money policy is still in place with ZIRP and strong
primary liquidity growth. But, evidence suggests the Fed is now suppressing short term interest
interest rates and the QE3 taper program is progressing and is now below 50% of the original
$85 bil. in monthly securities purchases. Bond yields are above their absolute cyclical lows but
are not threatening.
Secondary: Business sales and profits are expanding and there is sufficient economic slack to
support a couple of years of further growth without overheating and toppy earnings. The
expansion has broadened out, but there is still a drag effect imbalance between demand and
income, with the real wage not progressing. Consumption is becoming more reliant on credit
generation. But, note that the banking system is quite liquid still. Somewhat faster economic
growth is absorbing more liquidity now, and QE3, although shrinking in growth, continues
to provide liquidity in support of the capital markets. Keep the QE erosion in mind as it
will become more of an issue.

Valuation
The market is significantly overvalued on trend earnings and investors are being asked to pay
a slight premium multiple on elevated cyclical earnings. It can be argued that with companies
having moved over the past 20 years to an elevated rate of earnings plowback (60%), there
should be a premium for the faster earnings growth that a higher plowback implies. But since
the global economic pie has not expanded to meet this improved potential, earnings have
become more cyclically volatile as companies have had to shuck a greater number of losing
or sub par investments when the economic environment softens.

With elevated valuation, investors are looking further afield at foreign markets, PMs, selected
commodities and bonds (chasing yields down to levels unsustainable longer term).

Technical
The cyclical bull is in place and it has been strong enough off the 2009 low to suggest that a
new longer term bull may be underway. It is a an extended market on a long run basis, but
lacks the spectacular trajectory that indicates a price bubble is underway. Just remember
about this latter point -- there does not have to be a price bubble to have a very nasty cyclical
bear market or even a sudden crash - like decline.

The SPX is now getting quite overbought on the weekly chart. The weekly comment recently
passed anticipated the strength of just prior days, but it may be now that an interim top is fast
developing. SPX Weekly

It is interesting to note that there has not been a deep oversold since the autumn of 2011.

Global Economic Supply & Demand

Global economic demand has accelerated moderately this year as expected, with industrial
output growth rising about 4% yr/yr to a more normal level. Operating rates have improved
slightly but not enough yet to cut heavily into still formidable industrial excess capacity. After
a very rocky start to the year, world trade began to improve in the spring but trails the growth
of global output. Pricing pressures are starting to build but are moderate so far, although CPI
advances are broadening out. Overall, the results have been modest given the very heavy easing
action by the world's major central banks.

With an improving picture for global economic demand, and, belatedly for trade, US investor
appetite for foreign stocks has been on the rise. But, the SPX has been the better performer
against the rest of the world since the kick off of the large QE program by the Fed in late 2012.
However, with the tapering of the QE program now well underway, the momentum of
improvement for the SPX vs. the rest of the world has itself tapered off considerably. Since
US industrial output is now running 4% yr/yr against an improving global picture, it could be
tougher for the SPX to hold the lead as we go forward. SPX vs. MSCI World (Ex. US).

Emerging Markets -- At Resistance

Back on Feb. 4, I wrote a piece on emerging market bond and stock funds. Back then, I found
both the emerging bond (EMB) and the emerging equities fund (EEM) at interesting technical
junctures. With global industrial output slated to perform moderately better in 2014 after a
sour period, it seemed appropriate to dust off these two trades. Now both are up at important
resistance levels Emerging Markets (Click on link and then click on the EMB and EEM Charts.)

The JP Morgan EMB has since moved up from the 106 level to 114.6. It has followed US
Treasury prices and is now well overbought and with Tresuries stabilizing after a good run, this
more volatile fund could be a bit risky following a nice recovery.

The EEM never reached the 35 level which would have made it a more prefect trade, but it
has rallied up to three year resistance and with the SPX weekly now moving up into overbought
territory, traders should keep EEM in mind as short term vulnerable.

Both the markets may be interesting over the next year, but the preference here is to let the
overboughts at resistance play out in the short run.

SPX -- Weekly

Technical
The cyclical bull continues on. Momentum indicators are trending positively but are starting
to approach overbought levels for the first time since late 2013. SPX Weekly There is room to
the upside short run, but the move off the spring low of 1820 is well advanced.

Fundamentals
The market has been more sensitive to the weekly economic data. My weekly cyclical funda-
mental indicator (WCFI) is up 6.2% for the year so far, while the SPX is up 6.1%. Moreover,
the strength in the WCFI this year was primarily from mid - Feb. to the end of May, which
corresponds to the bulk of the positive action for the SPX. The WCFI was essentially flat
through Jun. which also corresponds to the anemic positive action for the market during the month.
Two important items in the WCFI -- unemployment insurance claims and sensitive materials
prices --  have provided no lift to the broader indicator since May. Since both these elements
of the WCFI are forward looking, it means market players are looking for confirmation that
the economy is set to stay on a stronger footing.

Long Treasury Price

In The Short Term
The TLT fund has been an excellent performer  so far in 2014, rising from support at 100 to
115 recently before settling down some. TLT Weekly It has been my oft stated view that the
weakness in the stock last year was way overdone and that strength this year was a positive
reaction to a deep oversold that developed as last year wore on. There is a mild downtrend line
in price dating from mid - 2012 which is being tested now as traders ponder whether a new
bull leg is underway or whether we have seen an appealingly strong counter - trend rally that
is about to run its course.

I have a caution light for the TLT price now. My shorter term yield directional indicator
(industrial output + sensitive materials prices) has been trending gently up since the middle
of 2012 and has reached all - time peaks seen in 2007 and 2011. This means that the industrial
economy may finally be ready to lift out of a lengthy period of consolidation which has favored
the bond market into a more advanced cyclical stage of expansion which may be less friendly
to the fixed income sectors. That will be so if industrial production continues to expand at a
moderate pace.

In The Longer Run
The TLT fund fell to a price of 90 at points over both 2010 and 2011 when long Treasury
spiked well over 4%. When a broad range of monthly economic and financial data is reviewed, 
it turns out that there are no basic numerical differences between now and the 2010 and 2011
periods when rates spiked. What is different, and this may be crucial if the economy can keep
expanding at a rate fast enough to use idle resources, is that unlike both 2010 and 11, confidence
in the maintainance of the ZIRP policy by the Fed is much stronger now.  In short, TLT may
have substantial downside price risk if the economy progresses to the point when the Fed
decides to raise short term interest rates.

There has yet to be a decisive breakout in my yield directional indicator. But a test is ahead
and, since the Fed is already suppressing short rates, it is appropriate to recognize the major
downside price risk to TLT even if the Fed continues ZIRP in the months just ahead.

Gold Price

Gold has seemed ripe for a cyclical bounce on stronger monthly economic data and and
the assumption of a moderate cyclical acceleration of inflation. Since the autumn of 2013,
the dollar value of industrial output measured yr/yr has advanced from 4.2% to 6.5% through
May. In addition, the oil price has been rising from a seasonal low in Jan., 2014. These are
mild cyclical positives for gold but in no way supported the price rocket we observed for
bullion from late 2013 into Mar. Gold Price Daily

The gold price may have have benefited form the inability of the SPX to break out from the
1850 resistance area earlier this year. Note on the chart how it lost luster when the SPX did
subsequently move above 1850 (SPX is in bottom panel of chart).

The gold price is below its high for the year but is on a more sustainable path of recovery
to reflect expected stronger inflation. But there was a lesson in the early going which is
that gold may benefit rotationally if the stock market falters. Weaker gold and a stronger
stock market since the autumn of 2011 suggests strongly a stocks sell off, should one occur, may temporarily benefit gold even if the cyclical case for the metal is not consistently supportive
as some gold bulls return to the fold.

Oil Price & Oil Stocks

Since global economic recovery took hold in mid - 2009, the basic trend of the oil price has
risen +12% per year and the "normal" high / low range has been about  $20 bl on WTIC. The
current range is about $98 - 118. The market has been well supplied this year, so the oil
price has been rising comparatively gently until the crisis in Iraq caught the news. The oil
price is winding up a period of seasonal weakness and the Iraqi situation may have kept the
crude price above $100 bl in June. WTIC Weekly

Holding Iraq aside, it would be fair to see oil reach a bit above $120 at its seasonal peak based
on past experience, but since the price has had a relatively mild and stable advance so far in
2014, my $120 projection for this autumn looks a bit suspect, and it make take production
disturbances in Iraq to bring oil up to the $120 level.

Even if production disruptions in Iraq over the next 12 months are minimal, industry experts
are counting on Iraq to produce an extra 3-4 million bd over the long term, so unless there is
a relatively peaceable political reconciliation there, traders may add a premium to the price
of crude to account for the risk of a major production growth shortfall should Iraq remain
unstable or even dissolve into separate political entities. The risk of a production shut down
in southern Iraq's major southern fields now appears remote given the activation of a very
large group of Shia militias from Baghdad on south to Basra and the presence of US attack
aircraft in the region. In the current fluid situation, The US must first protect Its large
embassy in Baghdad, but since an unlikely run by ISIS down to Basra could trigger a large
increase in the price of crude, the US, however reluctantly, might launch air strikes down
in the region.

The relative strength of the oil group against the SPX is shown in the bottom panel of the chart.
As expected this large out of favor group has experienced a positive reversal of fortune on
expectations that stronger global economic growth coupled with low spare capacity at the
wellhead would be a a nice plus for relative performance. In addition, continuing price
recovery in natural gas is helping along.The RS line for the XOI is coming up on resistance
at .90, and may falter without further positive crude price momentum in the months ahead.

Inflation Potential

The view here since last autumn is that faster liquidity growth would lead to somewhat faster
global economic growth and that such would produce some acceleration of inflation. I have
been looking favorably on oil, natural gas, gold, silver and commodities in general. Measured
yr/yr, the CPI has moved up from a depressed 1.0% for Oct. '13 to 2.1% currently. My
forward looking inflation gauges are continuing to advance as well. Consider the yr/yr rate
of change in the CRB commodities composite (top panel) CRB Weekly

However, the world is after all still trying to shake off the effects of steep global recession, so
you need to exercise some discretion here. There is still slack in global productive capacity
and in key large developed economies such as the US, wage gains have barely kept up with
inflation as slack continues in the labor markets as well. To sustain accelerating inflation in
a normal cyclical fashion, there eventually has to be follow through to wage rates or else real
incomes can be punished enough to weaken growth of demand.

Materials and commodities prices have been rising and there have been some positive cyclical
moves for traders to capture. But it is still too early in the game to pronounce the return of
substantial inflation on a more durable basis.

The CRB has recovered up to the 310 - 315 area. The model I run on commodities suggests
fair value is at 335. At that level, there would be a better balance between supply and demand.
So, there is some value in the commodities sectors but realize that economic demand has to
remain firm for an extended period to take up the slack.

Monetary Policy & System Liquidity

Short Term Rates
The cyclical case for raising short term interest rates is in place, although it is not a table
pounder as cyclical pressures although present are not that powerful. So, the US is finally
in an era of rate suppression. Because of the technical difficulties in raising rates during
a period of substantial QE, the issue probably remains tabled until the QE program ends later
this year. The 2yr Treas. note shows signs that investors are putting biases on an end to
ZIRP and some upward pressure on the inflation rate. US2Yr.

Liquidity Cycle
Banks are expanding the scope of lending. There have even been upticks in home mortgage
and home equity balances. The broad measure of credit driven funding (excluding QE) is
up 6.5% yr/yr through May which is strong enough given inflation of only 2%. The monthly
growth of private sector liquidity funding now exceeds that of QE as the cycle edges into a
more mature phase. With the dollar value of industrial output rising at 6.5%, the Fed is likely
reasonably satisfied with progress in 2014 to date. Still, the responsiveness has been a long
time in coming, and the balanced growth and funding will have to continue after QE is retired
for the tapering program to be a success and for the Fed to have leeway to begin a return to
more nearly normal operation of monetary policy.

Economic & Profits Indicators

Coincident Economic Indicator
The US economy continues to strengthen over the stall speed levels seen from late 2012
through early 2014. The economy has picked up from one / third speed to two / thirds
with my CEI through May at + 2.0% yr/yr. There is a continuing drag on the economy from
low employment growth plus flat real incomes reflecting modestly higher inflation and
low wage and entitlements growth. Household confidence has improved and consumers are
willing to borrow more and this has helped sustain faster business sales and production growth.
Moreover, economic recovery / expansion is broadening out. Overall, still far from pretty but
better than it was.

Business Profits Indicators
My proxy for business sales -- the value of industrial output measured yr/yr -- was up 6.5% in
May. This is the strongest reading since mid - 2012, and hits my projection for what sales should
be doing for the remainder of the year. Profit margins should be expanding now on the
stronger volume growth and an improving selling price / cost ratio as a little extra pricing
power has developed. The one negative here was a faster build in inventories relative to sales
earlier this spring. This may be part of a bounce back from the nasty winter, but keep an eye
on it.

Production capacity shrunk from 2009 - 2011, but is recovering modestly, rising to + 2.4% yr/yr
in May. The addition of real capital for business is a healthy long term development, although
further strength in the growth of production and delivery capacity may eventually slow share
buybacks with a pivot in budgets.

Stronger business sales this year is crimping the growth of financial liquidity that may be
available to flow into the capital markets. The partial offset for equities investors is faster
earnings growth.

SPX -- Daily Chart

The market hit an overbought situation early in the week, and with no momentum follow -
through, traders are taking some money off the table. SPX Daily Chart Note the RSI and
MACD readings for early in the week. The SPX was not strongly overbought against its 25
day m/a. The market remains in an uptrend off the Apr. 2014 and will remain so if it can
hold above 1920 in the next couple of trading days. You should probably take note of a
prospective reversal in the downtrend of the VIX. If such occurs, this signal would imply
that the developing complacency among players could be evaporating and that a degree of
further price attrition may lie ahead.

Traders did not care for the data on retail sales released today. Sales were positive but less
than hoped for. There was also a strong move up in the oil price which is seen as threatening
the growth of discretionary income. With QE tapering proceeding, players are less forgiving
of economic data shortfalls.

Oil traders have their first little bit of excitement in a while and aim to make the most of it
as the news tape from Iraq unfolds. How much further down the road to Iraq's dissolution
this all goes is still a tough issue. The Kurds may well have opted out of the union today
by taking Kirkuk, a northern city / oil center they have long considered their own. Whether
the new jihadis can make into Baghdad remains to be seen. If the US is prepared to initiate
air strikes, the militants will need to disperse quickly as proud columns of troops in trucks
can be eliminated fast by US attack aircraft. And, if the US is prepared to use air strikes,
the militants will be hard pressed to carry their fight to the big oil fields and terminals in
the far south of Iraq. The other key swing factor in the early going will be Shia troops or
militias and whether and where they might be prepared to join the battle.

Appointment In Samarra

Samarra lies about 70 miles due north of Baghdad. That's where the Sunni Islamist militants
are nibbling at the outskirts of this ancient city. They have already overrun Iraq's northern oil
fields, refineries and pipelines. With  a small, combat seasoned, heavily armed force, they may
capture the northern half of Iraq. Native Sunni tribal chiefs, the military and the police have
largely quit their posts. No refugee flow has has grown so large in so quick a time in history.
The militants have naturally hit all the banks on the road to Baghdad and have scooped up tons
of abandoned weaponry. They hold a huge territorial area area with a small force but lots of local assistance.

The Iraqi government is imperiled, the Kurds rush to defend their border, and Turkey is busy
warning the Islamist militants off. It has the makings of a very big story, and how it plays out
from here will fascinate. But for the markets in the near time there will be the question of what happens to the production, refinement and transport of crude and downstream products from
this major producer. WTIC Crude Daily

Oil is in an uptrend and is challenging resistance again. Reaction to this explosive situation in
Iraq has been muted so far, but things are happening at lightening speed on the ground.

Google Shows The Story

Growth company Google resumed market leadership after the last substantial market
correction way back in 2011. A stock with a decent beta, it corrected sharply earlier this year
along with about 60% of the total market. GOOGL Daily Note the test of the 200 day m/a in
early May. Lots of technicians watched that action with baited breath. Note as well the action
of the intermediate term MACD. About 60% of the total market fell into a similar MACD
pattern including the fact that probably less than 50% of the market has experienced sufficient
price momentum to cross the zero line on the way up. You will note that Google like most stocks
has yet to cross over into positive territory on MACD. That tells you that despite the rally in the
SPX, there is still above average risk in the market.

Stock Market -- Weekly

Technical
As indicated in the 5/30 SPX weekly (scroll down) the market has broken out of a congestion
zone to new highs. The breakout extended this week with the SPX closing in on the channel
top in place since autumn 2011. SPX Weekly The MACD, though historically in an upper
register, has turned positive to confirm the breakout. You have to go back to the late 1990s
bubble years to find a weekly MACD reading which has remained so continuously highly
elevated. The market is also 7.5% above the 40 wk m/a and is inching up to another strong
overbought reading. Historically, buying into these sorts of elevated momentum and MACD
markets works out profitably only about 25% of the time, but investors have made it pay
nicely since the spring of last year when the market was propelled up to high levels on these
important measures. (In the interim, more conservative traders like me have been left out in
the cold.) The RSI is overbought, but the chart shows how an overbought reading can last
several weeks especially when price momentum hums along.

The VIX index shows new levels of confidence and complacency were reached this week,
and may be its time to take note of this even granting that a low VIX reading can continue for
a good several weeks running.

Price momentum is o.k. and market breadth is solid. Volume remains awful and this may well
bother players considerably more if prices continue to trend higher on light volume.

Fundamentals
Purchasing manager combined data for new orders have been positive throughout the recovery
but showed a trend of deteriorating momentum from late 2010 through mid - 2013. Save for
the recent winter (Jan. / Feb.), combined new order data has been relatively strong since mid -
2013 and weekly leading economic indicator data remain in an 18 month uptrend. Moreover,
banks have been lending in support of higher working capital needs. Investor focus has
meanwhile shifted from the Fed's QE program which is now winding down to the better
business fundamentals. Earnings estimates are inching up after months when estimates were
consistently cut and this has helped stocks recently.

With QE tapering substantial and ongoing and business data at the forefront again, investors
should be become increasingly sensitive to how well the economy is doing. This is a big
change from last year when mounting monetary liquidity was the dominant theme, and players
were very much more tolerant of slips in economic momentum.

Eurozone Quickly Revisited

With industrial output only marginally above 2010 and price deflation a couple of clicks away,
The ECB countered today by cutting rates, suspending sterilization of basic monetary liquidity
and via targeting more asset purchases and steps to make more credit available to smaller,
growing firms. All to the good because the steps increase liquidity that was on its way down
from modest positive levels. These moves are also designed to undercut support for the
Euro. Maybe these steps will postpone the development of dangerous deflationary pressures
by leading to an improvement in economic demand levels, but unless we see production growth
re-accelerate markedly, destabilizing social and political measures will intensify further.

The Eurozone stock market is getting overbought in the near term, as players have been
anticipating ECB easing action. But there could be more follow through in the near term
especially if business confidence responds just ahead because the ECB comes to be seen
as providing substantive cumulative support.

China -- Big Red Dragon Getting Cranked Again

Well, there was a spell or two in recent years when the the central bank (PBOC) tried to
tamp down the monetary press. Cumulatively, it hit the overheated real estate sector recently.
Now the PBOC has the long term growth of its money M-2 back up near 20%. The economy --
real GDP plus inflation -- needs only about 10% growth to function decently, so the rest of
the money finds its way into the property market and all the credit specialties that are in one
way or anther collateralized by real estate. In the early part of the past decade when China was
still in its super growth phase, I figured the authorities could balance growth against debt well
enough that a big and terrible blowout would not arrive until well after 2020. I did not change
my thinking much even after the collapse of the stock market bubble, but the gov. under Hu
and Wen panicked during the deep global recession  of 2008 - 09. Money and debt have
exploded up even as real economic progress has decelerated. So, in just five years time, China
has created a potential economic catastrophe for itself and those who are dependent on China prospering.

The authorities have far reaching reform plans and perhaps with periodic relatively short term
bouts of tight money that shake out the property and credit markets, China can re-balance its
economy and achieve sounder but very much more modest growth. Since patriotism is the last
resort of scoundrels, nationalism and militarism may play a more prominent role in China's
future as the authorities nudge the economy toward a lower growth path. The US sees that
China is in deep shit with its economy now, and will need to focus far more on China's offensive
military capabilities as time goes on.

Here is a chart of the Shanghai exchange. SSEC Daily I watch it because it is a post - bubble
depressed market and once in a while there is a good trade as occurred in late 2012 when the
Fed's QE program kicked in. I think if investors believed China had a good shot at sustaining
real GDP growth at 7.5% as is so often discussed as an objective, the SSEC would trade
more in a range of 2400 - 2500. Given the trend of the SSEC and the number of trips down
to the 2000 area, players have a lower target in mind for China growth. In any event, since
the PBOC is again adding liquidity, upticks in the economy could provide a nice rally for
a few months.

Eurozone: Kings Of The Phillips Curve

According to the Phillips Curve, inflation varies inversely to unemployment. The Eurozone
has persistent unemployment at a double digit rate and is veering toward deflation with a
recent CPI of 0.7% yr/yr. The ECB, which has struggled to keep the Euro economy afloat after Mr.
Trichet trashed recovery chances with an anti - inflation program in 2010 before he retired, is
set this week to ease policy further ostensibly with a cut to short rates and a program to make
more credit available to cash strapped smaller businesses. Euro M-1 money which had responded
nicely to easing polices under the Draghi regime has pitched down in growth to 5% yr/yr and
appears  on a recessionary and deflationary course unless the ECB engineers further liquidity
growth for the system. With private sector credit demand still falling and fiscal and regulatory restraint still the order of the day, the ECB is the only game in town. Moreover, social pressures
are building in the EZ and are fostering populist political movements. Further stagnation or
outright deflationary recession can only lead to more  social and political destabilization.

The Euro stock market could be interesting if The ECB can get away from minor tinkering and
fine tuning. Waiting much longer for further proof of economic deterioration before stepping
hard on the monetary accelerator could prove very risky in a deeply fundamental way.

IEV Euro 350 iShares  Note: the IEV is about 20% below the highs of 2007.

Stock Market -- Weekly

The cyclical bull market continues with a lift in recent weeks out of congestion to a new high.
The market is moderately overbought relative to its 40 wk. m/a at a 6.5% premium. RSI has
reversed positive but without a pull back of consequence this year, The SPX RSI is again
approaching an overbought reading. The MACD has reversed a downtrend in place for most
of the year, but remains high by long term standards. Even so, a 12 wk. MACD does not
whipsaw that often. SPX Weekly

The bottom panel of the chart shows the VIX or volatility index. The current very low reading
of 11.40 suggests a high degree of complacency among traders and investors. Unfortunately,
the VIX may not give much warning of impending trouble by rising with the market. In
recent years, it has tended to lurch up when sentiment changes, and now, it may need to speed
up to 20 before the caution light goes on for many players.

The red horizontal line at SPX 1800 signifies when the SPX is hyper-extended on a very long
term basis. The SPX is now nearly 7% above that line and suggests that price risk is very
high and rising. I have never been long the market unhedged during the very few intervals in
history when the SPX is so extended. The green horizontal line at SPX 1485 gives its value
16.5X long term trend earnings which is currently $90 per SPX share. Investors are thus
paying a nearly 30% premium for cyclically elevated earnings. It is an expensive and risky
market.

My weekly cyclical fundamental indicator (WCFI) is up about 5.5% this year to date compared
to a 4.1% advance for the SPX. The stock market trounced the performance of the WCFI from
its deep interim low in 2011, but so far this year performed more in line with this forward
looking indicator. this may be happenstance, but so far in 2014, the market has payed much
closer attention to fundamentals on the ground than in recent years when SPX momentum
more naly matched the power of the Fed's QE program.

Gold Price

My view since the last couple of months of 2013 has been that global economic performance
should improve in 2014 and that, even if gold is in a long term bear market following the
bursting of the price bubble starting in latter 2011, the gold price was entitled to a counter -
trend cyclical rally in 2014. I did not assign a price objective, but I have been thinking it
could rise to around $1450 oz. by year's end off that low base of 1200 set late in the year.
And there was a good rally to kick of this year which carried the metal to 1380 before it tailed
off. Gold Price Daily Chart

Gold can be very volatile, so I did not think too much about the action in recent weeks. I have
been watching gold against the oil price and I think in March gold probably got a little
overpriced relative to oil as well as on its own RSI. The downdraft in the gold price now
has it approaching an oversold level and maybe also moving back in line with the oil price.
Well I have not changed my mind on prospects for gold this year, and I like the supportive
trends in oil and sensitive materials prices ($DJAIN on the chart). Even my inflation thrust
indicator is moving a little bit higher.

The amusing surprise with gold so far this year is that geopolitical tensions and uncertainties
are on the rise around the world, but there has been little discernible portfolio hedging in
favor of adding to gold ownership. the gold bugz used to feast on this stuff.

Stock Market

The short term uptrend in the SPX broke late last week, but the market has hung modestly
above a rising 25 day m/a, so despite the trend line warning, it is still technically rising. The
SPX is trading steadily in the bottom half of the band set in Jun. 13 but it has not broken
down. Price momentum has been barely positive in recent months and there has been more
whipsaw action. The SPX has been bending but not breaking, and to celebrate, the VIX, or
volatility  index, has been trending down to very low levels signifying rising confidence.
SPX Daily (VIX index in bottom panel).

The Fed's QE program is subject to steady tapering and it appears it will zero out before
the end of 2014. Clearly, momentum players have lightened positions in their favorite
momentum stocks and that could drag on intermittently as QE winds down. On the plus
side, the private banking sector is providing more credit which it must do if the economy is
to grow once QE is over. The focus on QE has been strong enough that it is tough to tell
how mindful investors are of a positive transition from monetary stimulus to credit.

Monetary liquidity growth, although starting to fade, is still strong enough to drive faster
economic performance this year, but realistically, we have yet to see that. This means that
the stronger earnings projected for 2014 are under a little cloud. Investor patience does
remain buttressed by continuing very low short term interest rates and an inflation rate that
is not threatening to the p/e multiple.

The QE taper experience has the US in an experimental situation and as far I am concerned,
the market is holding up remarkably well given that there are risks in the environment that it
is very difficult to quantify as we move to a flat Fed balance sheet.

Long Treasury Yield % -- Caution Flag

The long T yield % rose up to levels in 2013 that made little fundamental sense. There has
been a substantial and warranted retracement this year until just recently in my view. $TYX

The chart shows a clear and inviting downtrend in the long T % since the outset of the year.
But, some reservations are in order. The yield has gone from a large premium to the 200 day
m/a to a growing discount. This signals a move from a bond which was strongly oversold in
2013 to one which is increasingly overbought. The yield on the bond is now below 3.50%
and long term bond players should not be carrying net long positions at this level. Because
I still hold to the view that the US economy should do quite a bit better over the course of
2014, a cyclical uptrend in the yield dating back to the summer of 2012 when The Fed put
QE 3 into play is appropriate and is being tested now following a period when  the yield
was badly overextended to the upside. Lastly, as the bottom panel of the chart shows, sensitive
materials prices have turned up and this usually adds some upside pressure to the long bond
yield.

I may change my mind out ahead about whether the powerful liquidity cycle still underway
will fail to boost the economy, but for now I think a good range for the long T should be
about 3.40 - 3.90 %.

Economic & Profits Indicators

Coincident Economic Indicator (CEI)
When my CEI hits 3% yr/yr, it usually shows moderate growth with a reasonable balance
between output and income. For all of 2013, the CEI averaged a paltry +1.3%. the average so
far for this year through April is +1.6% for a modest improvement. The most distressing factor
last year was the poor performance in the real wage. This year's tough winter weather
notwithstanding, I think the cumulative effect of a depressed real wage last year has led to a
deceleration of real retail sales this year which has been a drag on the performance of the CEI
for 2014 to date. As well, the momentum in the growth of civilian employment was low in
2013 and this also contributed to a lack of progress in aggregate spending power.

This year the real wage has done better as has employment growth, so the potential to see the
CEI pick up in growth somewhat is there. However, businesses are still not doing the hiring
and paying well enough to get the economy on a more substantial and sustainable footing.

Business Profits
S&P 500 net per share rose about  2-3% yr / yr in Q1 '14. With unseasonably cold weather in play,
utilities led the way. My US sales proxy increased by 4.5% for the quarter, and experience shows
with that kind of modest growth, it is tough to maintain profit margins before the beneficial
effects of share buybacks. Pricing power was again subdued and the price / cost ratio likely
retreated. On the plus side, April may have been the best month so far in 2014 on a yr/yr basis.

Looking back at late 2013, analysts were expecting SP 500 earnings per share to rise by at
least 10%. We are going to have to see much better operating performance from here to
reach 10% or better profit growth.

Stock Market --Daily Chart

With a move to new high this week, the SPX has developed a short term uptrend with
a rising 25 day m/a underneath it. the low that anchors the trend is the 1816 level set
in April. The market is slightly overbought and the trajectory of the advance is modest.
The SPX sits about mid - range of the rising channel dating back to late Jun. last year
and has been struggling to stay above the mid - mark. SPX Daily

The market is still in a powerful uptrend range that dates back to late 2012 when the Fed's
big QE program of $85 bn. securities purchases was initiated. The Fed's balance sheet
expanded by near 37% in 2013, strong liquidity support for a last year's 30% rise in the
SPX. Fed Bank Credit has expanded at a 20% annual rate so far in 2014, but players know
it is being wound down steadily but rapidly. It may be mere happenstance, but the slow
rise in the SPX since the end of 2013, appears to reflect the modest progress in net per share
rather than a still powerful but dwindling tail wind from the Fed. If this is indeed the case, then
the powerful uptrend for the SPX in place since late '12 is likely to break down as the year
wears on.

The web has its share of continuing bull cycle stories and a growing number of correction
ahead and full bear stories. It is still a bull market with defining new highs and ascending
lows, and its still a mild economic expansion with an experimental monetary policy
regarding liquidity management. And, you have to pay up to play it long. Right now, the
critical supports are in the SPX 1845 - 1860 area.

Financial System Liquidity

The growth of total financial system liquidity continued to moderate in Apr. but remaians
a hefty 10% yr/yr. Transactional liquidity, which excludes the large volume of excess or free
reserves, grew at 6.3% over the period. Because growth has been mild and inflation low,
transactional liquidity growth has left a modest excess above the needs of the real economy
which has been a small positive for the capital markets. Banking system balance sheet liquidity
(excluding excess reserves) has moved lower as lending has picked up but is still ample by historic
standards.

The Fed is slowly easing into a period of short term interest rate suppression as shorter range
credit demand has swung more vigorously positive. Even so, with idle resources in the
economic system and a short term credit supply / demand pressure gauge at only +2.5 in
favor of demand, the Fed is meeting its ZIRP commitment without real strain in the
financial markets yet.  

Breadth of loan categories seeing expansion is improving save for residential real estate
where lending standards have yet to be loosened appreciably. Banks are doing cash flow
test lending now rather than collateral value only lending, but young home buyers face stern
reviews.

SPX-- Daily Chart

the SP 500 is up about 1.5% for the YTD. Resistance in this slow moving market has moved
from SPX 1850 up to 1880. Realistically, for the short term the market is essentially trendless
and adrift. There is a wide-band uptrend in place since the end of Jun. 13, and in the past few
weeks,the SPX has been operating in the lower portion of that band as momentum has faded.
The 25 day m/a is flattening out and MACD and RSI trends are drifting lower. Even breadth
has begun to flatten out. SPX Daily Chart

But, despite this weak internal showing, the market remains in an upwave dating back first
to late 2012 and before that to the latter part of 2011. It is the third leg - up to a cyclical bull
which started in Mar. 2009.

With the Fed's QE tapering program well underway, the QE momentum players are cashing in  
and have been hitting the momentum stocks like the dot.coms very hard. Many investors are
now hedging on a positive fundamental environment by rotating into more defensive areas.
One popular move is to "hide cash" by moving into utility stocks as a defensive tactic at
a time when bond yields have been falling and power output has been seasonally strong.
(The bottom panel of the chart shows the strength of the SP 500 relative to the utilities.)
Some of this defensive behavior no doubt is due to the severe winter experienced in the US
but likely also reflects degrees of investor concern over how well the economy will do as
the QE program is wound down to zero.  Keep in mind that this unique experiment is being conducted with a p/e multiple on the SPX of over 17x. Remarkable confidence is being
shown when you consider we are working with theory and not tried and true rote.

Gold Relative To Oil

The old rule of thumb is that 13 barrels of oil buys you an ounce of gold. It is an important
relationship because periods of accelerating inflation over the past 130 years frequently get
rolling because of booms in the oil price and the remainder of the petro sector. the relationship
between the oil price and the price of gold was shelved as the first decade of the new century
wore on because of  high volatilty of each of the price series. Interestingly, however there
has been a return to the 13x ratio recently $GOLD / $WTIC

The oil price has made a cyclical recovery since a bubble collapse over the second half of
2006 and the gold price is much lower in the wake of a bubble bust starting over Half 2 of
2011. Given the importance of oil and petrol to inflation, perhaps it should lead the price
of gold by at least a little bit.

Since the old rule of thumb has recently been restored, I am willing to say that most of the
financial / monetary / economic crisis premium built into the price of gold over the past five
years has been wrung out. There has an important reset, one worth keeping in mind if you
are a gold aficionado.

Stocks vs. Treas. Bonds & "Sell In May"

Stocks have traditionally been vulnerable as springtime wears on because that is normally
when the Fed is completing the unwinding of liquidity it has provided seasonally for the
prior holiday season. Sometimes the drought is made worse by larger than seasonally expected
tax payments. Even with the QE programs, M-1 money supply has had flat spots in the spring.
Now as it turns out, the weekly leading economic indicators have been weak or flat during the
spring months since 2010. Seasoned traders will sometimes take money off the equties table
and plunk it down in longer dated Treasuries during these periods. SPY Spyder vs. $USB

I point this out because M-1 has been flat since late Feb. this year and also because the
weekly leading economic indicators are showing a little weakness here owing primarily to
a jump in initial jobless claims. So the bond market has firmed not only because basic
liquidity is tighter but also because the QE taper is very well underway, with the latter
reflecting concern among some players that economic growth may slow down the road as
a result.

I do not want to make big deal out of this seasonal liquidity and economic indicator weakness
but you should be aware of it. The longer term issue -- whether the taper of QE down to zero
will adversely affect economic growth down the road -- needs a few more months of
evidence from incoming data before it becomes interesting. 

Oil Price And Industry Stocks

In the last review on Feb. 27, I made an odd call that the oil price could weaken in the next
few months, perhaps to $95 bl., but that industry stocks could do well on the promise of
faster global economic growth and a more stable uptrend in the price of natural gas. This
turned out to be a good and profitable guess.

It could be time to be a bit more edgy about the oil situation. The price of oil is entering a
seasonal period of consolidation / weakness that could last well into July before the normal
final seasonal push higher commences. Not surprisingly then, the uptrend in the WTI crude
price which began early this year has been broken. $WTIC Daily Chart

There is a primary trend channel of $18 per bl. high to low that has been in play since mid -
2009. The current low for the trend channel is now about $95 - 96. Because there is more
supply on hand than I thought there might be now, and because we are moving into a more
challenging period on a seasonal basis, it might not be unreasonable to check and see if
oil can hold the longer term uptrend over the next month or two. Sound overwrought? Well
if you trade oil it might not be at all if there is continuing inventory overhang.

The bottom panel of the chart shows the relative strength of the $XOI oil composite against
the SP 500 Spyder. You can see the stark positive reversal here but note that the relative
strength of the group is just turning a little wobbly after a nice run against the broader market.
Could be the group is setting up to cool off.

Long Treasury Bond Yield %

My main message on the long guy for 2013 was that the run up in the yield was way too
rapid. Players received another warning at year's end when the long T failed to take out
the long term downtrend in yield at 4%. There has been a nice rally in the long bond this
year, with the yield coming down from the 3.95% level to 3.45%. $TYX

The chart shows an important and longstanding fact. When the yield travels too far up or
down from its 200 day m/a, count on a reversal before long. Spreads of 50 basis point often
signal it is time to begin to watch for a reversal in trend. Note that now the long T yield has
moved inside the 200 day m/a. This suggests that the risk to long positions in the bond has
begun to rise.

Note as well the red horizontal line on the chart. In this era of ZIRP and low inflation, I have
used the 3% line to sell long side trades and leave a couple of $ on the table. The green
horizontal line at 3.50% is appropriate for longer term players in this era. It warns the yield
is too low and the price too high to warrant long term positions given that  the ZIRP / low
inflation era is likely to have a rather limited duration.

I use the combined momentum of industrial output and sensitive materials prices to provide
a yield directional indicator for the long bond. This indicator has been quiescent since early
2012 and has only just started to perk up again. With better output growth and some firming
of industrial materials prices in evidence, the long T yield may begin to reverse to the upside
before long.

Stock Market -- Weekly

It remains a cyclical bull with a third wave up from autumn 2011 still intact. The market
continues in a consolidation period, although a head and shoulders top could form as well as
a low momentum secondary top up near SPX 1890. Volume has been fading as has momentum
although NYSE  breadth is holding up well. The SPX is 4.8% above its 40 wk m/a which indicates
a moderate but not worrisome overbought. My intermediate term momentum oscillator turned
bearish at year's end, but there has been no break of consequence yet in the SPX. The
attached chart shows that both RSI and MACD have also been trending down without any
serious result, either. SPX Weekly

The SPX is fully valued and some players no doubt do not care for the Fed's QE taper down
program. The local fundamentals remain positive save for the taper. The situation in Ukraine
has not blown up yet, but both sides have been injecting more troops and hardware along
the potential "hot zone" in the far east of the country. A Russian invasion in and of itself
could disturb risk capital and there could be a wider disturbance if an invasion were to
introduce stronger economic warfare against Russia with retaliation likely. Russia's
credibility is shot, so traders will be focusing primarily on ground action if any in the days
ahead.

Stock Market Fundamentals -- Update

This post builds on the 4/21 Monday post -- just below.

Directional Fundamentals
The Fed's M-1 basic  money supply (cash & checkables) stands at about $2.75 trillion. It has increased by roughly $1.2 trillion since the QE programs first began in late 2008 and I would
estimate about $700 billion of this increase reflects the flow of $ from QE into the transactional
part of the financial system with the bulk of the remainder of the $3 trillion + QE money sitting
in the excess reserve account the Fed holds for banks.  Excess Reserves

Over the past half dozen years, M-1 in current $ has grown at a ripping 12%. That represents
10.3% growth when adjusted for inflation. Based on very long term relationships, the strong
basic money growth has been a powerful stimulant for the stock market. Since real  M-1 may
benefit in a lagged way from QE even as it winds down, I plan to watch this indicator going
forward as well as the lazy way of just trying to match up market performance with the size
of the Fed's balance sheet. The velocity of M-1 seen against the economy has declined sharply
reflecting the modest US recovery from near depression conditions, but since companies have
been so successful in boosting profit margins, the stock market has benefited greatly from
the powerful monetary liquidity support despite the downshift in money velocity.

When broadly measured, if transactional financial liquidity grows faster than the economy,
excess liquidity is generated, and this can be a major support for stocks as well so long as the
economy is positive and investor confidence is reasonable. The monetary and economic
turmoil of the 1999 - 2012 period greatly disturbed the longstanding relationship between
stocks and surplus liquidity, but recent data suggest matters may finally be returning to normal.
One factor to keep in mind here is that more vigorous economic growth if accompanied
by a cyclical acceleration of inflation can sharply reduce liquidity available to the capital
markets. My excess liquidity indicator has declined from a moderate 3.0 level seen last year to
a slightly positive 1.0 currently as the economy has perked up.

Valuation
Using mundane economic, profits and dividend growth assumptions, it is easy to make a
reasonable case for a 15 p/e ratio. To argue for the current 17.4 p/e, you have to assume
inflation and interest rates will remain non-threateningly low and that profits growth will
exceed the long term rate of 6.5% per annum. So a narrow focus of this sort can net you
a premium valuation so long as you waive off certain micro and macro risks. Steadily
rising profit margins reflect growing imbalances centered around seriously skewed income
distribution and under-investment in facilities and people that will make stable progress in
the US more difficult in the future. The transition away from QE remains a work in progress
and the ability to efficiently mange monetary policy in a post QE world is a question mark. 
Moreover, major foreign economies -- the Eurozone and China --  are in the throes of change 
which involve major challenges. These are all hard factors to ignore and do not fit easily
into the textbook concepts of stock market valuation.

Stock Market Fundamentals

Directional Fundamentals
A strong "easy money" positive remains in place. Primary liquidity measures continue to
grow in outsized fashion. T-bills trade a few basis points over the 0% level. Corporate bond
prices are in an uptrend. Profits are growing. Inflation is low.

Even with a successful full taper of the QE program and an eventual rise of short term interest
rates, the yield curve may not  flatten out enough to signal an eventual downturn in the economy
until as late as 2017.

But there are risks. The US economy is growing as the Fed tapers, but we cannot be sure
business / banker confidence will hold up as the Fed zeros out the growth of its balance sheet.
If the economy manages well, we will see the Fed eventually abandon ZIRP and begin
to move rates higher. This could lead to sharp gains in rates at the shorter end of the maturity
spectrum and such might suppress the market's p/e ratio. The specter of an eventual return
to a more nearly normal monetary policy operation -- tighter liquidity band and a cyclical rise
of short rates -- may already be causing some caution in the stock market, leaving players
leery of an eventual price correction. This is why Ms. Yellen is directing her verbal ammo toward
keeping the short end of the curve from getting ahead of where the Fed would like to see it.

SPX profits rose sharply over 2009 - early 2012, with 12 mos eps coming close to the top of
a very long range band. If profits regain stronger momentum over 2014 - 2015, we could see
earnings back up to the top of a rising band which would normally signal a very mature market
and economic expansion. But for now, this idea may be a little far ahead of the story.

Valuation
The SPX is relatively fully valued at about 17.4 x latest 12 mos. net per share. The p/e ratio
is above norm on cyclically elevated earnings. The SPX is trading at 20.8 x normalized
long term trend earnings, which is up at a level not seen that often. Can investors push these
valuation measures higher? They have done so in the past and surely can this time. If such
happens, recognize that fundamental risk will rise sharply and there will be players who
start searching more diligently for risky assets with more appealing risk / return tradeoffs.

Inflation Potential

US inflation has decelerated very sharply from a cyclical 2011 peak of 3.9% yr/yr down to 1.5%
recently. With a sluggish economic expansion, capacity utilization is up but one percentage
point over this interval, thereby putting very little cyclical pressure on pricing. As well,
commodity prices remain well below levels seen in 2011 despite the recent upturn. $CRB
A rise of inflation pressure can be "validated" when wages rise concommetantly, but the
US wage has remained quite subdued. Also, since businesses can try and recapture their
rising capital costs via higher pricing, little pressure has come from this area reflecting
the Fed's ZIRP on short rates and tame long term interest rates. Finally, when you consider
that significant economic slack is still extant in the Eurozone and China, businesses  are
wary of raising prices lest market share be lost.

On a global basis, new order rates have moved up moderately over the past three quarters
and my inflation pressure gauge, which gives heavy weight to both commodities prices and
operating rates, has also been rising over this period. However, the pressure gauge, which
foretells the future direction of the CPI, has only begun to exhibit the momentum and power
which normally accompanies a firming business environment. The upshot is that the CPI so
far remains well muted although some acceleration can be expected if the pressure gauge
continues to rise from here as expected.

Economic & Profits Indicators

Coincident Economic Indicator (CEI)
My CEI is an amalgam of four measures -- production, real retail sales, civilian employment
and real earnings and is presented on a yr/yr % change basis. A reading of +3% implies
reasonable and balanced economic growth. Through March, the CEI ran 2.1% or at two thirds
speed. Output vs. income showed decent balance and the full measure was far better than the
stall speed interim low of 1% set in Jul. '13. The 2.1% reading for Mar. represents a positive
break from a downtrend which had been in place since early 2011. With a very strong liquidity
tailwind still in place, the CEI should eventually recover further up to 3% yr/yr sometime this
year.

I also follow export sales and construction spending carefully. Export sales are recovering
from a flat period over 2012 -- early 2013 and construction spending is relatively strong
with the exception of the public sector where much larger infrastructure investment is
sorely needed.

The US economy has benefited substantially from the winding down of fiscal restraints
which dogged late 2012 and all of 2013.

Profits Model 
Measured yr/yr, top line business growth was 4.5% for the first Q of this year, down slightly
from the final Q of 2013 on tough winter weather. Normally, it is not easy to maintain
profit margin when business growth drops below 5% yr/yr. Moreover, costs grew more
than did pricing power. There was a positive offset in that hiring trailed real output growth
by a moderate degree. Excluding share buybacks, operating earnings were tame.

Although I think it is fair to be concerned about the economic effects of the eventual
elimination of QE, I am still looking for top line growth in the US to reach 6 - 6.5% yr/yr
by late 2014. So far this year, the shortfall shows primarily in very modest pricing power.

Ukraine vs. Russia

Key economic data show Russia is on a pronounced glide path to recession. Ukraine is an
economically and financially broken country. Since patriotism can often be the last refuge
of scoundrels, I, unlike many US investors, take potential armed conflict in eastern UKR
seriously. UKR's prior leader looted the country and Putin and his guys have yet to find
policies to reverse a clear economic slide. And, you do not put 40k troops with attack craft
on your neighbor's border for the hell of it. As much as the West may hope these two proud
countries can settle differences peaceably, actions on the ground in stressed areas even if
carefully choreographed can subvert detailed plans once some shooting starts. Since Putin
and Lavrov have pissed away credibility with the West, the markets may focus more on
activity at ground zero if matters heat up. Hope all goes rationally and peaceably.

Russia? I'll take Kissin and Pletnev over Putin and Lavrov any day.

Test For Global Stock Market (Excluding US)

So far this year, players have chipped away at the elevated p/e ratio of the US market. With
QE headed into eclipse or worse, This should come as no surprise. In recent years, US
stocks simply killed it against the rest of the world, but change has been occurring slowly
as seen in the relative strength  of the MSCI World (Ex. US) vs. the SPX.

The relative strength index for the global market without the US has been trending weaker
but note the extended base in place since the middle of 2012. Note also that the downtrend
could now be reversing to the upside. Finally, check out how the MSCI world index has
tended to lose ground in the spring time, a period when the SPX has been vulnerable on a
seasonal basis. If the US market corrects further over this year's second quarter and the
MSCI World holds up in relative strength, that could be a real telling sign that investors are
inclined to continue to look more favorably at the international scene. Moreover, with better
global growth, mild pressure on the US$, and upturns in oil and other commodities tentatively
underway, interest abroad could pick up again even if the higher beta MSCI World falters
a bit this spring on a weaker SPX. 

Stock Market -- Sixteen Month Bull Run On Life Support Again

The current up leg runs back to late 2012. A tight, powerful up channel broke down in Jun.
2013 after the QE taper concept was first introduced by the Fed. Since, the market has
experienced a somewhat milder and more volatile up channel. There were downward breaks
in Oct.'13 and again in early Feb. Both were quickly repaired and the rally continued. There
was another break today. The market has also held up very well against its 100 day m/a. But,
it broke below the "100" again today. The SPX is modestly oversold in a short term down-
trend. SPX Daily Chart

The SPX has been through several breaks like the current one only to bounce back from
the rough area of trend support and I regard the current situation as critical but not serious
as of yet. Obviously, to avoid another whipsaw to the upside, we need to see further and
extended technical damage over the next week or so . I  would also point out that the more
deeply oversold NASDAQ Comp. closed out today right out on its rising trend line of 4000.
These declines in index prices to support levels will not be lost on seasoned traders who will
watch the tests just ahead with great interest.

The beginning of this third up wave in the current cyclical bull market began in the Fall of
2011. This longer term trend was last tested toward the end of 2012. As of now, the SPX
at 1816 must hold above the 1760 - 1775 area to see the current wave stay intact. The major
focus as we swing into next week will be on whether the market will whipsaw again, but
since the longer run trend has not been tested for over a year, you may want to keep the
lower, longer term support levels in mind as well.

SPX -- Daily Chart

I am spending more time on the SPX short term, but the chart is interesting. SPX Daily
The market is still hovering around 1850. There is a confirmed short run downtrend
underway with a slight oversold reading. But as you can see, SPX 1850 has turned from
being a resistance level into support. There was no reassuring bounce today, but some
players will like the fact that the SPX is holding the new support and has not broken down.
Amusing stuff.

Economic Indicators

My expectation for 2014 has been that corporate / business sales should grow by 6 - 6.5%
and that profits should do even better via improved operating leverage and a firming of
pricing power. Output growth in real terms was stunted in Jan. with the bad weather, but
appears to be improving both in terms of production and new order flow. The surprise so
far this year has been the continuing low rate of inflation and the negative consequences for
business pricing power. So far this year, my pricing / cost ratio has been modestly negative
which normally makes it difficult to increase operating profit margin. However, in the
finance sector, credit growth is expanding which will boost net interest margins and fees
could rise from stronger underwriting and M&A activity (Bank stocks have done a little
better than the broad market since autumn 2013).

Despite the outlook for stronger global economic growth over the first half of this year,
my inflation pressure gauges have been dormant as operating rates have yet to rise fast
enough to offset capacity slack, particularly in China. In turn, here in the US, wage
growth remains low although real incomes are rising because inflation has been so low.
That is OK for the real economy now, but the low wage growth could easily be pressured
in real terms if  cyclical inflation pressures finally emerge.

More on profits and my coincident economic indicator later next week.

Watch The NASDAQ Composite

The SPX took a good lick on Fri., 4/4, but is still holding its uptrend off the late Jan. '14 low.
Not so the NASDAQ which is in a confirmed short term downtrend and which just broke
below its 100 day m/a for the first time since the autumn of 2012. Since the NASDAQ has
been a strong leader among broad market sectors, you'll need to watch it to see if it proves
contagious to the other major sectors like the critical SPX. $COMPQ Daily

The NASDAQ is moving down toward an oversold condition but is not there yet and carries
trend support down around 4000. Given the occasional high volatility of this market and
the fact that confidence lost is not quickly regained here, further weakness would be no
surprise as this has been hometown for momentum players.

NASDAQ Comp. Skids In Relative Strength

The NASDAQ, weighted up with techs, net service and an assortment of other high flyers,
has accelerated to the downside compared to The SPX in recent weeks. The frothy ones are
being clipped as momentum players, remembering 1999 - 2000 especially, have moved to
take some money off the table. You have to watch this kind of action. Sometimes it merely
heralds a rotation out of the high beta, high risk game into more stable names and then there
are those times when 'de-risking' grows contagious and the broader market suffers as well.

Emphasis on the hot stocks started to get into 'chase 'em up' mode over last summer and
peaked in early Mar. Since, there has been a clear break in the RS trend line of the NASDAQ
which sees it retreating rapidly to the RS trading band of recent years. NASDAQ Rel. St.

From a short term perspective, this trade is getting oversold, but given the contagion underway
and still extant profits to be secured, the NASDAQ RS line could easily fall back into the
trading band of recent years (See chart).

Also keep in mind with the NASDAQ that if a more general market pullback is getting started,
the 'NAZ" can often lag the SPX when the next upturn gets underway.

Market Breadth -- Short Term Overextended

Here, I use a daily NYSE cumulative breadth chart with a Keltner channel measure.$NYAD
The chart is a little curious as the price momentum of the market has been rather dull so far
in 2014 while breadth has been fairly strong. That says small upticks in price as sellers are
not shy. But, note as well that the A/D line is getting rather overextended against its Keltner
band, a condition that suggests a new round of price consolidation ahead.

The SPX has received a nice boost from Ms. Yellen's pro - easy money 'pep talk' on Monday
just past. Her fingers are perfectly fine so far although she is playing with fire.

Stock Market -- Weekly

Fundamentals
The Fed has in effect laid out a plan to return monetary policy to normal operations by
sometime in 2015. This would include elimination of the QE program via the tapering
of asset purchases and the elimination of the ZIRP. Assuming moderate economic growth
over the next 12 months and a degree of cyclical inflation pressure, the Fed will find itself
behind the curve in starting to raise short term rates next year. News of the shift in Fed
thinking has been cumulative and the stock market has been able to muster only a 0.5%
gain on the year through 3/28.

There remains sufficient slack in the US economy to drive economic growth right into
2017. After a year long informal holiday, the banking system is again responding to rising
loan demand, a response that will likely prove essential to supporting economic growth as
the QE tapering process eventually zeros out the inflation of the Fed's balance sheet.

Because the bad winter and so far lousy spring weather retarded growth, it is not clear yet
that the economy can sustain a moderate level of expansion as QE winds down and it is
thus not clear whether the Fed would end ZIRP even by as late as 2015.

If all goes according to the Fed's estimates and plans, the policy of easy money probably
has another 12 to 15 months to run before it officially ends. Moreover, the stock market
has shown a tendency to rise until the yield curve flattens out. A flat yield curve could
well take a couple of years beyond 2015 to develop fully.

The market has lost some players to the QE taper program and it may also be losing
some players who wish to use a better US and global economy to start to diversify away
from US stocks -- the performance bellwether since late 2011. Other investors may
grow cautious because the initiation of a program to boost short rates by the Fed can
produce a classic market correction. The hard core bull cadre will desire to join in
trying to push the market higher until the easy money policy officially ends.

The flattening of the SPX so far this year reflects these crosscurrents as neither the more
cautious of investors nor the bulls have been able to cleanly gain the upper hand. If the
economy performs alright, there could well still be a battle over an appropriate p/e ratio for
the market.

Technical
The SPX has lost momentum, the uptrend since late 2012 is getting shaky, the indicators
are fading and the VIX has elevated slightly. Even so, the market has bent but has yet
to show a break. For example, note that down moves of consequence have not occurred
until the MACD structure falls below + 25. SPX Weekly Quite something.

30 Yr Treasury %

With the spring of 2013, the long bond yield began a lurching move up which defied over 40
years of close ties to cyclical economic factors. The chart of the long guy has industrial
commodities prices in the bottom panel. The market was sensitive as usual to the direction
and momentum of such prices until May of last year when yields surged while the industrials
continued to fade. $TYX

The talk of tapering the big Fed QE program was introduced by Bernanke last spring, and
the long Treas. yield took off as market players, anticipating economic growth sufficient to
warrant a taper and an eventual end to the Fed ZIRP policy reset the yield to begin to
accommodate  a return of the economy and monetary policy to a more normal relationship.

The Treasury yield has come down over 40 basis points this year to date as the market has
returned its attention once again to the cyclical fundamentals which typically govern the
direction of yields over the shorter term. Here, traders have noted a slow start to industrial
production in the States and sloppy sensitive materials pricing.

I am using a range this year for the bond of 3.20 - 3.80%. I have not changed my framework
yet for faster production growth and inflation for 2014  and am content to use a yield range
with less volatility than normal.

Bond yields have run up well ahead of the fundamentals but the eventual direction of cyclical
factors should support firmer yields at some point over 2014. In the interim, traders need to
exercise heavy due diligence as the yield at 3.51% is starting to get mildly on the low side
relative to its 200 day m/a.

Analysis -- US Treasury Yield Curve (2 Yr / 10 Yr)

Attached is a link to the  most commonly used Treasury yield curve: $YC2YRhttp://stockcharts.com/h-sc/ui?s=$YC2YR&p=D&yr=3&mn=0&dy=0&id=p15064831307


Strong Slope: 300 basis points (BP) or higher short to long. Robust economy in early stage
when short rates are low and bond investors grow skittish. Generally Positive for stocks.
Flat Or Inverted: Shorter term rates on par with or higher than longer rates. Indicates that
credit / liquidity squeezes  have developed and implies economy in pre-recession mode.
Usually is a bearish indicator for stocks.

The chart shows the positive slope has recovered sharply since the news of and subsequent
implementation of the Fed's very large QE program. The current slope of near 230 basis points
reflects current investor bet that the economic expansion will not substantially accelerate plus a
continuing low inflation rate. The very narrow 120 bp slope in mid - 2012 shows just how
concerned the Fed was about the economy back then and how welcome QE was initially.

The dip in the yield curve in 2014 is a response to the impact of severe winter weather on the economy as well as a firming of the 2 yr. yield as the Fed hints about an eventual end to the
ZIRP program (The prospect of ending ZIRP has had little effect so far on the short end,
but if its specter draws nigh, expect short end yields to rise faster than longs).

Enough economic slack has been consumed in the economic expansion and the tensions
in my short term credit  supply / demand pressure gauge have increased enough to
make study of the yield curve more worthwhile going forward.

Stock Market -- Daily Chart

The SPX broke off a short term uptrend from its Jan. '14 low and is now drifting sideways.
Price momentum has faded some, but the primary trend remains positive. In late June of
last year, the SPX entered a more volatile phase of its extended cyclical advance. As we
move into the new week,  the current trading band is SPX 1895 - 1805. The market's
flatness in Mar. to date has wrung out the short term overbought and watered down the
intermediate term overbought. SPX Daily

Short term RSI and MACD shown on chart are both drifting lower. Note how MACD has
tended to reverse and head lower when readings get up to or within hailing distance of +20.
Comparatively speaking, the SPX has experienced a disciplined advance since late 2012
with the exception of more volatility through a widening of the trading band.

The 10 day m/a has turned down and is approaching a rising 25 day m/a. Short run players
should pay extra attention if the 10 drops below the 25 m/a.

There is still a chance the SPX is making a secondary and perhaps problematic top since
the index has not yet decisively cleared the prior top area of Dec. / Jan. at 1850.

Weakness in the SPX over the past year has been well contained by the 100 day m/a and
this measure has worked well as a base of support going forward.
----------------------------------------------------------------------------------------------------------------
This week Obama is off to Europe for a G-7 meeting. Naturally, the gang will be 
discussing UKR / Russ and what they may do if Russ crosses borders with its forces.
To get Ms. Merkel especially to focus on this problem, NATO and White House
officials have today talked up the idea that Russian boys may be ready to attack
further beyond Crimea.

Gold Price

The gold price did build in a mild "safety" premium as the Russia vs. Ukraine crisis built up
a little steam, but the price cooled recently as there was no military follow through by Russia
beyond Crimea. Obviously, this geopolitical situation could grow worse in a hurry if the
Russians send in armed force to take more territory in the region. Gold at $1338 oz. could
test down to $1320 -25 if the UKR / RUSS situation stabilizes. Gold Price Weekly

Notice that Gold did flunk its first test at resistance close to $1400 over this past week. The
metal remains in an uptrend, but safe haven and / or cyclical bulls need to keep this mind
going forward.

The chart shows the gold price with two longtime favorite travel buddies -- the oil price and
an industrial commodities composite ($DJAIN). The oil price has entered a seasonally strong
period, but there is some supply overhang in oil as unseasonally strong winter demand for
heating fuels winds down. Oil is expected to regain positive footing again as we move further
into spring. Industrial commodities prices have been punished by slower global economic
growth in recent years, but I still look for firming global demand as the year progresses.

Gold did get a little pricey in recent weeks, but there is still a reasonable chance it can advance
for more mundane cyclical reasons.

Monetary Policy

Tomorrow is Fed policy day (FOMC). Stocks players are anticipating a policy based 'pep
talk' from Ms. Yellen.

The economy still has resource utilization slack and is coming off a slow winter. Even so,
classical indicators which traditionally govern the direction of short term interest rates are
edging very much closer to suggesting that the time may be near for the Fed to begin to
move the Fed Funds rate % up. The Fed is normally inclined to raise short rates when my
business strength index tops the 135 level. It is now sitting around 132. It has been up here
before during the recovery but during that period, short term business credit demand was
still declining. Not so  now, as my short term credit supply / demand pressure gauge is moving
up in favor of demand, indicating tighter conditions at the short end. This is the first time
during the current economic recovery that all the indicators, including non-financial
commercial paper demand, are in position to signal it is time to raise rates.

If the economy improves further as 2014 wears along, you can expect the hawks who have
pushed for QE tapering will turn their attention to the Fed's ZIRP short rate policy. On balance,
the Fed is likely to stay with its ZIRP policy for as long as it can easily get away with it even
if the economy improves further as now expected. So far, investors have willingly gone along
with the policy. For example, the 1 yr T-bill mostly stayed in a tight .09 - .20% range since latter
2011 even though inflation has averaged well above that miniscule rate range over this interval.

An improving US economy and perhaps an additional bit of inflation pressure may well lead
players to demand a higher yield with the 1 yr "T" eventually moving up to .50% or higher to
signal the Fed that is time for Them to review the ZIRP. 1 Year Treasury Yield

Since there may finally be an economic case to raise rates coming, the issue of 'interest rate
suppression' would at last become relevant. A healthy economy in the long run would
feature a balance of savings and investment rather than the strong emphasis on asset inflation.
With housing prices and the stock market in solid recovery mode and no financial incentive
to save, continued economic expansion  from here should prompt more attention on the issue
of the continued desirability of a ZIRP even if the Fed goes on to suppress rates.  

Economic & Profit Indicators

Coincident Economic Indicator
Measured yr/yr, my coincident indicator is up a paltry 1.2% and remains in a downtrend
which began in early 2010. Surely, the bad winter weather over the eastern two / thirds of
the country into early Mar. punished economic performance, but the continuing lack of
even moderate real income growth remains a drag factor as it has since the inception of
the economic recovery. The US has also experienced a slowing of its export growth in
recent months, which may be more fully explained by the weather.

As the US moves into springtime, the expectation is that there will be faster economic
growth as winter loses its icy grip, but unless businesses pick up the pace of hiring and
start paying better, the economy will struggle to escape the low growth mode.

Business Profits
The economy did experience stronger production in the final quarter of 2013 and even
though pricing power remained rather subdued, profits performed well. Measured yr/yr,
business sales have been sluggish so far in 2014, and with little pricing power, operating
margins (excluding per share indexation from stock buybacks) were probably under some
mild pressure. Since the month is not done yet, maybe business activity will pick up in
the relative absence of severe cold and storms and save the quarter from sluggish readings.

Banking System Credit
Over the past three months, the banks have stepped up lending to a nearly 8% annualized
rate of growth. So if the tough winter has pinched business cash flows, banks have been
willing to step up and meet credit needs. We need to see much more of this if the economy
is to do well as the Fed tapers the QE program

Stock Market -- Weekly

Fundamentals
Monetary liquidity growth remains strong yr/yr but momentum is fading as Fed taper program
takes hold. With little genuine historical precedent, this remains enigmatic to me. Sustainability
of market's p/e ratio may be in question.

Inflation rate and short term interest rates are low. Enduring positives.

Weekly cyclical fundamental indicator (WCFI) is trending up. Progress of WCFI since market
low in latter 2011 is intact but trails the market indices by a country mile reflecting dramatic
increase of p/e ratio.

Right ahead we have another FOMC policy outcome (Mar.19) and we'll see more on Putin's
regional mania with possible strong economic repercussions if Vladdy keeps up the push in
Ukraine. Time for the EU to rise and shine. West vs. Russia economic warfare cannot be ruled
out. A full plate for the next week.

SPX commands a mild premium p/e based on cyclically elevated earnings. Risk is higher.

Technicals
Weekly up trends from latter 2011 and late 2012 still intact, although market is mildly extended
off the 2011 low. Since late 2012, trend has strongly beaten indicators when it comes to the
direction of the market. SPX Weekly

Basic roundtrip in the SPX since YE '13 has allowed the intermediate term overbought in place
to run down to a mild level.

 Failure of the SPX to hold for long above the 1850 resistance line sets up issue of a secondary
or low momentum top which formed earlier in the month. Such can precede trouble but need
not.

Parting Thought
consensus of the press and geopolitical pundits has it that Putin and the West have thought
everything through and that both sides believe they have the bases covered. Don't count on it.

Break Time

One of the nice things about being a discretionary trader is the luxury of not having to be
in the markets every day. Some developments are ahead that may involve hazard and or
opportunity.

The FOMC Meeting  is Wed., Mar. 19
This one also involves a press conference and will star Ms. Yellen, the new chair. With further tapering of QE on the table and folks wondering still about Fed intent regarding short term interest rates, there may be some volatility in the markets over the next 5-6 trading days.

Ukraine vs. Russia
Annexation of Crimea by Russia seems to be proceeding. Not all residents are keen on the
idea, so some commotion can be expected. Since this is standard Russian grand larceny
foreign policy, a shit storm of protest would be appropriate. Next, the EU may finally have
to get up off its collective ass and pound Putin with some sanctions of consequence. NATO
also will have to decide on what it should do if Putin has it in mind to swipe more east Ukraine
real estate. More military hardware is moving into the vicinity of the  Black Sea, Poland and
the Baltic. If NATO / G-7 decides to stand its ground, we may find the markets unsettled.

Russia ETF: RSX  Now down at critical support.

US Strategic Petrolem Reserve

West Texas crude has lost nearly $5 a bl. in price since late last week. Physical stocks are
up and winter is winding down. But the DOE also announced it is planning a "test sale" of
5 million barrels of crude, the first such since 1990. The sale involves a small fraction of
the reserve but it is timely for several reasons. Oil was about $10 a bl. high on a seasonal
basis with industry responding tardily. As well, knocking $5 off the oil price sends Putin a
message about new US flexibility with oil as domestic production continues to surge. A
weaker market can punish Russia's revenue take and budget. Finally, Political unrest in
Venezuela is growing and turning more violent as the economy implodes with rocketing
inflation and acute shortages of everything but anger. The sale from the reserve may test
more than just checking up on mechanics and logistics for oil release.

Stock Market Comments

Bubble?
The classic sign of a market bubble -- an extended period of super powerful price momentum
which takes the market very substantially above its long term range -- is not in evidence. For the
SPX to be in a bubble, it would have to run up to about 3500 by the latter part of 2015. It has
not exhibited that kind of price trajectory for a good several years. Since bubbles always pop,
and often calamitously so, it can be very misleading to tab a speedy, positive market as a bubble
because such carries the implication of an eventual disaster. Strong, positive markets can
terminate without fierce carnage, and, if economic fundamentals dictate, a mild bull market
can end in a rout. The SPX has been getting increasingly expensive since 2011 and as such,
market risk is on the rise. However, basic fundamentals and not terminology will mark its
fate.

Price Momentum Concern
I am a bit troubled that the SPX although rising is showing a downtrend in price momentum
in its 200 hundred day price oscillator. SPX vs. 200 day m/a The uptrend in the oscillator from
the deep 2011 low has also been broken. Clearly, the deterioration of momentum measured
this way has not harmed the market over the past two years. Significant price corrections often
show up with a corresponding sharp fall in the 200 day osc., so a persistent slow fade need not
trigger off an alarm signal. But, it could be a symptom of eventual difficulty and is worth
watching for that reason.

Gold Price

For me, it would clearly be better if the gold price was responding primarily to better economic
news without the safe haven clutter. Note when you view the chart that the gold price is
encountering overhead pressure at the $1350 oz. resistance line and that the short term
readings on RSI and MACD are not sending a promising near term signal. Gold Price Chart

Now that topless feminists have been tangling with security cops in Crimea's capital, the
situation there has veered from serious to surreal. Through all so far, no one has loosed off
rounds from an AK 47 in anger, but how long might that last? One can understand palpitations
among gold players.

Commodities Market

The argument has been that the global economy should strengthen further in 2014 and
that a cyclical recovery in the commodities market would eventuate. The market is up
nicely this year to date, although tough winter weather in North America likely set off
tighter supply / demand conditions in various sectors. The market has started to reverse
a longer term downtrend and has taken out near term, but minor resistance. It is also now
overbought on a short term basis and you may want to take this into account. $CRB Weekly

For more, check out the 2/14 post on this market which also contains a link to the 11/6/13
post. Commodities market

SPX -- Daily Chart & Fundamentals

The SPX has broken above 1850 resistance and has moved on to a new all time high. The
market is moderately overbought in both the short and intermediate terms. Looking back
through the end of 2012, it has reached a level in the short run when positive price
momentum ought to begin to roll over although the SPX can continue to push somewhat
higher. SPX Daily Chart


A study of the indicators shows that the near term overboughts have not been that hard to
short over the past 14 months, although the rewards of shorting have not been very rewarding
relative to the risks assumed given the strong trend of the SPX.


Viewed longer term, the SPX is on an unsustainable trajectory that continues to be fueled
by the Fed's QE program, which although shrinking, remains a potent force. The loss of
momentum  in the growth of monetary liquidity has yet to show persuasively that it will be
a constraint on the SPX p/e multiple, although the market  is up just 1.4% year to date.
The weather seems set to improve seasonally, so we'll soon see the bounce back potential
in the economy realized, even if modest (Since grandson and I have had to use a sledge -
hammer to clear the drive and deck of ice, I can assure you it has been a tough winter).


The SPX is trading around 17.4x estimated latest 12 months net per share. The market
commands a premium for cyclically elevated earnings even as the US economy has yet to
be tested on how well it may perform once QE is done and reliance on private sector credit
becomes more crucial. It is expensive, so each of you have to determine your comfort
level.


Since there's no way I am getting up at four a.m. to look in on Ukraine and the happenings
there, I'll have to take the volatility in the markets as it comes along.

For Christsakes, Vladimir

My younger daughter, an inveterate punster, said at lunch today: "When are we going to get
tired of Putin up with these guys?" One problem in dealing with the US is that you never can
be quite sure when a standing president is a killer diller or not. So, as Ukraine goes to full
military mobilization and Putin's boys expand their reach into the far eastern Ukraine, Putin
is counting Obama as a nice guy pussy cat who will not use US wiles and force to allow
Russian troopers and logistics to get stretched on a westward move with large NATO air and
naval power close at hand and also with NATO able to quietly inject advisors, supplies and
weapons into Ukraine nationalist strongholds in the western end of the country. Putin's bet
has to be that NATO will sit on its hands and allow Russia to try to work its will in Ukraine.


Because Putin can so easily put his guys and the Russian economy into deep shit with this
move, and because the Ukraine, despite its deep faults, well deserves to decide its own
destiny, one hopes cooler heads will prevail. Desperate guys are the most likely to do
desperate things.


I am watching the ruble and the Russian stock market. RTSI Weekly Chart Note that an
oversold is developing on the RTSI as it approaches critical support down around 1260.
There could be a nice rally here if Putin backs way off the current course. A sharp break
below support in a troubled environment could send the RTSI much lower.