Stock Market

Since the end of 2011, SPX net per share has moved up a little over 17%. The market has soared
though with investors adding a little over 4 multiples to the p/e ratio to bring it a touch over 17x
latest 12 mo. earns. This jump in valuation constitutes a major upswing in market player
confidence. The key driver appears to have been the Fed's ZIRP on short rates and the provision
of ample liquidity. Looking back to the close of 2011, it took nearly two years for these policies
to breath life into the progression of of earnings, which appears to be on a stronger course in
2014. Now, the Fed is steadily unwinding the big QE 3 program, and with better business
performance and rising credit demand, has taken to suppressing short term rates to hold the
ZIRP at least until the easing program is fully zeroed out late this year. Measured yr/ yr,
total system liquidity growth is still very strong relative to economic progress but the liquidity
situation is likely to continue deteriorating well into 2015. The private  financial sector has
stepped up to provide more liquidity in the form of credit, but, as it does so, the hawks on the Fed Board will greatly increase pressure to end the ZIRP and raise rates.

Inflation has decelerated substantially since 2011, and with the economy progressing modestly,
investors have cut the rate at which they discount future streams of earnings and dividends. This
too, has allowed the p/e multiple to expand. Now, typically when there is rapid growth of
liquidity, profits respond but so does inflation with a lag. There has been a mild pick up in
CPI momentum recently but not enough to be troublesome yet.

From 12/11 through 12/13, the SPX compounded at a nearly 24% annual rate. The market is
up this year so far but it is running far below the 24% rate and many smaller stocks are down
on the year.

With net per share growth stronger, and monetary policy in transition away from super
accomodation, it is logical to expect p/e ratio contraction well into 2015, unless of course
investors want to press the advantage of a lengthy transition in monetary policy toward
normalcy to full if not reckless advantage. The fundamentals are very good now, but are
headed, gracefully I hope, downhill.

I have continued to regard the gradual reduction of the QE program as an experiment with
risks to the market and the economy and not as a done deal transition to a smooth continuation
of the economic expansion. I watch economic momentum very closely.

SPX -- Daily Chart

The low test zone for the current short term downtrend is SPX 1900 - 1930 based on several
different support markers. So, with today's rally, the SPX has closed slightly above the zone,
but it is too early to tell whether there is a positive reversal underway or if there is further testing
and even a downside breakaway in store. SPX Daily

The market at -1.5% the 25 day m/a is slightly oversold, and both RSI and MACD are negative.
Most of the time, I look for trend reversals to enter positions and this would be one of them. 

The market is still holding the groove it has been in since mid - 2012 when QE 3 by the Fed
was first promised. However, with this program now running ever closer to the zero level, we
have moved quite a ways fundamentally from then and as tempting as it may be to figure the
groove will hold and the SPX is, indeed, near another rally point, conditions are turning less
favorable as the Fed cuts the power of the liquidity tailwind.

Oil Price -- Unexpected Fade

Since mid-2009 WT oil has traded primarily in a rising trend channel of 11% per year and
mostly within a $18 - 20 bl. range. The range for Aug. is set at $99 - 119. WTIC today at
roughly $96.50 has slipped below the low end of the channel for the first time in five years.
Despite the chaos in Libya and potential concerns for the long term potential output from
Iraq and Iran, there seems to be a little surplus developing at the wellhead despite rising
demand. And, the culprit may be none other than the US which has fast rising domestic
production and which is cutting Its imports. Late Jul. / Aug. is generally a seasonally firm
time for the oil price followed by a strong seasonal pop in Sep. WTIC is trailing the seasonal
pattern. Crude Chart

This is the first little warning of a shift in the dynamics of oil supply / demand since the deep
recession of 2008 and it bears watching. Oil supply overhang carries significant implications
for inflation, the US dollar, and consumer real incomes and confidence. Naturally, sloppy
oil pricing and a stronger dollar are unintended economic sanctions for Russia as well as
oil developers in general.

Given the volatility inherent in the industry since the 1970's, it is too early to make a big deal
out of it, but sometimes change sneaks up on you.

Ukraine Vs. Russia

It has been more than a month since the UKR army began to make military inroads against the
separatist rebels in the east. I have kept on eye on this because the UKR forces have been
operating close to the Russian border in an effort to interdict or shut down supply lines to the
rebels from Russia. The catastrophic downing of MH 17 drew attention away from the ongoing
campaign, but UKR military progress has been a surprise to many and it has in turn prompted
Russia to put up to a dozen fully outfitted infantry battalions along the border in the contested
area. Now Russia may only have been drawing the UKR forces in close to have the option
to conduct a cross -border combat operation that does not strain logistics and also wears down
the UKR military.

The Ukraine economy is still suffering and Kiev is become more unsettled politically. On the
other hand, Russia is experiencing a little economic rebound after businesses there over-
estimated the negative effects of sanctions imposed to date upon demand. Exports remain
understandably weak, but Russian authorities are not under immediate pressure to escalate
military activity to keep the populace distracted from observing the continuing failure of
economic policy to curb the deterioration of the Russian economy.

The situation could turn more serious if the UKR military keeps progressing in breaking up
the separatists' hold in the east and is able to seal off more of the border.This would raise the
cost of an eventual Russian incursion into the Ukraine considerably and it may lead Putin
to exercise the option of limited invasion to force the UKR military back.

It is hard to say how much the action in eastern Ukraine has bothered the major markets in
the weeks since the UKR military began offensive operations. But now that Russia has
moved fully combat ready units to the border, and is preparing its own sanctions program
against the West, the situation may command a little bit more attention.

SPX Daily Chart -- Cliffhanger

As expected the SPX did register an interim top in Jul. No genius here as there were a fair
number of people looking for a near term top. The fates conspired to engineer a most interesting
end to the week. Thurs. had a raft of heavy profit taking that saw the SPX fall sharply. Selling
continued today until the market hit key support levels, and then like magic, the SPX caught
bids and set off a short squeeze. At the end, The SPX rallied above that "golden" support near
the 100 day m/a and also closed very near major trend support around 1930. Quite a feat!
Here's the chart: SPX Daily

Despite the sharp recent sell -down, the market remains in the groove it has followed since
Sep. 2012 when the big QE 3 program was set up. All the sell offs since then that reached
trend support and the 100 day m/a produced near term oversolds that turned into solid dips
to buy. The Street wants you to feel this way come Mon. Had the SPX blown through all
this support, no end of technicians would have flipped bearish. No way to send people off on
holiday.

So, over the next week or two perhaps we get to see whether despite receding QE and the
prospect of an eventual  end to ZIRP, players want to resume pushing the market up on a
strong course or whether the guys decide to take it easier and acknowledge rising risk.

The market is in a clear short run downtrend and is mildly oversold. it is also unstable
despite today's close above the low.

Monetary Policy

Short Term Interest Rates
The Fed continues to suppress the very short end of the credit market and there is no firm
indication when It will lift the FFR%. Using a model based on 100 years of short rate,
inflation and credit supply / demand data, the 91 day T-Bill rate should now be around 2.2%
reflecting continuing low inflation but rising short term credit demand. So, the Fed, concerned
with idle labor resources particularly, now trails the curve suggested by the economy by a
significant margin.The hawks on the Board will press Ms. Yellen so long as the economy
does not regress to stall speed.

QE 3
The FOMC today cut the securities purchase rate to $25 bil. a month, on its way to zero later
in the year. Measured yr/yr, QE has added 24% to the Fed Bank Credit through late Jul., but
looking forward to mid - 2015, Fed Credit may well only be 2% higher if the economy holds
up reasonably. Thus, the economy is going to become increasingly more dependent on the
private sector for liquidity growth and as we look out a year, the likelihood grows that short
rates will also start to rise.

There are plenty of discussions out there as to when and and how fast short rates will rise.
I appreciate all that, but I remain keenly sensitive to how well business and investor
confidence hold up as the QE program unwinds to completion. So far so good.

China -- The Boys Have Fired Up The Dragon

Back in early Jun. I posted that the PBOC had turned accomodative with monetary policy
and that the equities market could eventually get interesting for a long side trade. See
China -- Big Red Dragon Getting Cranked Again

That post has a link to the Shanghai Exchange index ($SSEC). This post has a link to the
SPDR China ETF (GXC) which is light on liquidity but has given long side traders a better
bet in recent years than the Shanghai. GXChttp://stockcharts.com/h-sc/ui?s=GXC&p=D&yr=3&mn=0&dy=0&id=p71321227542

The GXC has quietly followed along with the SPX  since late 2011 as a beneficiary of QE 3
liquidity from the Fed while the Shanghai has continued to unwind from the 2006 - 07
major bubble. The GXC hit a record high just above the $100 mark in 2007 and there is
significant resistance now around the low $80s. It is an overbought index and could under-
perform the Shanghai going forward if the Shanghai gets some long missing manic action.
But, GXC has been a nice trade for which I thank the PBOC.

The Shanghai is getting itself overbought, too. Next resistance level for this guy is 2250 with
big time resistance set at 2450. Long time readers of the blog will recall that if folks turn
more serious about China being able to continue real GDP growth at 7.5% annually for the
next several years, that I think the Shanghai should trade up around 2400 - 2500.

If you read the early Jun. post, I argue that China has put its economy in harm's way far faster
than I thought it would. The PBOC may have to be on a loose  / tight policy treadmill to
wring out its badly overextended real estate markets for years to come. This imperative may
provide attractive capital markets trades both long and short over the next several years.

No Stock Market Bubble

There is no stock market bubble in place. For openers, the price trajectory of the SP 500 (SPX)
is not steep enough to qualify. However, there are shifting long term fundamentals you should
keep in mind. Over the past 20 years, SPX earnings per share have grown more rapidly than
over the very long term. Since 1994, earnings have compounded at near 7% vs. 6.5%
historically. That corresponds to a  big change over time. Moreover, despite the rather evident
cyclicality of SPX net per share, investors and traders have tended not to shade the p/e ratio much
at all as earning rise to a cyclical peak.  The SPX has come to be treated more as a stable growth
entity than as a cyclical one.

The SPX companies have been buying more of their stock in over time. This has been a plus
to earnings. Back circa 1980, successful companies were urged to buy in stock when the share
price was below book. The SPX has soared well over book value since then, but companies have
continued and enlarged the practice. This has increased the cyclicality of earnings because
firms tend to increase buybacks as cash flow from operations rises and slash them when net
and cash flow turn down.

There has also been a nearly manic emphasis on boosting profit margin as well. Business return
on assets % is a product of asset turns in sales times profit margin. In a globally competitive
world, achieving the pricing power needed to boost asset turnover is tough, so the emphasis
has fallen on advancing margins. Since the late 1990's business sales growth has fallen well
below the long term trend, but earnings growth has not lost a beat thanks to increasing profit
margins.

Many SPX companies with help from their outside auditors have also adopted the practice of
taking very large writeoffs during business downturns and claiming these losses as "special"
charges which are not counted in operating earnings (but do come off book value). And, yes
most acquisitions and mergers are done on a purchase basis rather than a pooling of interests
basis so that acquired earnings are additive and not dilutive. It is amusing to watch purchase
acquisitions boost earnings during business expansions and when they fail, be written off
as non-recurring expenses.

So, faster earnings growth over the past 20 years involves both solid productivity gains to
boost margins and smoke and mirror elements to help net per share on the way up and
artificially cushion it on the way down.

Investors have loved it all -- poor sales growth but improving profit margin and add-ons
to earnings from share buybacks and accounting gimmickry.

At peaks in the business cycle, we now have cyclically elevated earnings plus earnings
overstatement to pore through. In short, there has been an era of bubbly earnings coupled
with investors who have not discounted such performance until too late.

Net per share growth in the current cycle has yet to reach extended levels that should raise
eyebrows and given the available resources in the system, that moment may be a ways off.
The best bet is not just to watch  market price action and the p/e ratio but the aging of the
cycle itself and the excesses that be developing.


True stock market bubbles are rare but exaggerated cycle peaks are not. 

SPX -- Daily Chart

The failure to take out the late Jun. high of 1985 today has the average toppy. It may smoothly
blow above 1985 as the week progresses, but a nearly month - long double top signals more
attention from you if you're a player since these minor fails can sometimes herald that a little
trouble lies ahead. SPX Daily

Economic & Profits Indicators

Coincident Economic Indicator
My CEI rose by 2% yr/yr again in Jun. This has the broad economy running at roughly  2/3
speed. Industrial production growth, paced by oil and gas output, was the strongest component
followed by real retail sales at 2.3%. Measured yr/yr civilian employment growth remains at a
mild level, rising 1.5%. Real wage growth again declined as senior managements pay themselves
royally and leave table crumbs for the rest of the workforce. With banks now lending, it is the
greed of business at the pay window along with significant fiscal drag that keeps the economy
below its potential.

Profits Indicators
My proxy for business sales -- the dollar value of industrial output -- rose again at 6.5% yr/yr
through Jun. Good volume growth coupled with a slightly favorable price / cost measure
suggests profit margins probably expanded again in Jun. yr/yr. SPX quarterly earning power
is very near to $30 per share, and annual earning power is around $120. for a p/e of 16.5X
(assuming the SP 500 companies can hold the $30).

Liquidity Factor
The business economy is growing faster than is private sector liquidity. Since business demand
normally trumps the financial markets, stocks, for example, have become increasingly
dependent on the Fed's QE program, which is wending its way way down to shut - off this
autumn, as well as asset allocation strategies of the big markets players. Interestingly, money
market levels have remained at comparatively modest levels for some time. Ready cash is
flashing slim pickings.

SPX -- Weekly

I have been expecting the stock market to make an interim or intermediate term top here in Jul.
The SPX was becoming substantially overbought on the weekly chart, and the weekly cyclical
fundamental indicator has lately failed to progress reflecting a flattening of sensitive materials
prices as well as a lack of progress in the reduction of unemployment insurance claims. The
SPX is trading a little below its 7/03 all time high of 1985, but it has hardly rolled over. This
leaves the question of whether a top is in place open. SPX Weekly

The heavy technical overbought remains in place, but one always has to realize that overbought
markets reserve the right to get themselves even more overbought. As the chart shows, such
occurred in May, 2013 when the SPX bolted higher before registering a pull back. Back then,
of course, the market had the powerful tailwind of the full-on QE 3 program, a luxury it no
longer enjoys to the fullest. For my part, we'll just have to see whether the bulls can push it
significantly higher or not.

Oil Price

With concerns about Iraq's production capabilities near term in abeyance, West Texas crude
is trending down to a normal seasonal low through July toward $98 bl. The mild uptrend in
crude since late 2013 makes it clear supply is not substantially constrained relative to demand.

The next period of seasonal strength for the oil price runs from late Jul. until the end of Sep.
Barring a major supply disruption, hopes for a big upside finish in the price are fading. My
guess here is that the best oil can do through Sep. is about $110 bl. Moreover, the sharp break
in the price since fears of Iraq production cuts have abated, suggests that the expected  $98
seasonal low which lies just ahead may not be all that secure. WTIC Crude

The deal restricting Iran's nuclear materials output is supposed to be inked on Jul. 20. There
has been a little more progress in recent days, but the ayatollahs are getting balky on the
premise that Iran should have greater freedom over the long run to develop their program.
So, it may be that Jul. 20 will pass by without a firm deal. If so, there will be calls to give the
negotiations more time. Some in the Congress here will say nasty, hawkish things, and Obama
will come under increased pressure to nail down a strong deal. With all that though, it may still
be early to drag the 'bomb Iran' scenarios out of mothballs. However, if there is no deal soon
the hawks in D.C. will use the impasse to flog Obama ahead of the Nov. off year election and
Bibi in Tel Aviv can be expected to weigh in as well. Oil traders will have to pick up the
threads soon.

Put / Call -- Speculative Zeal Apparent

The CBOE all - equities put / call is a good measure of sentiment because it represents real
money down on the table and not just advice. The $CPCE has been in a downtrend since
late 2011, signalling increasing bullishness as calls purchased has steadily outpaced put
buying. In recent weeks the longs have reached their most adventurous yet based on the 6
wk m/a of the put to call ratio. $CPCE Weekly

No law says the zeal of the bulls must end here, but experience suggests we have a fairly
extreme reading as we head head into next week and it may portend an exhaustion of sentiment
sufficient to suggest a short term top. Riding the long side when the p / c starts falling from
.70 and above on down has been a decent trade since 2011, but the low p / c readings have
warned of consolidation or market weakness ahead. A low $CPCE reading may only suggest
mild market trouble ahead, but traders at least should be aware.

Setting Germany Straight

The US State Dep't charted Germany's geopolitical ambitions prior to WW 1. We have
neither liked or trusted Germany ever since. We spy on Germany now and we will in the
future. The fanciful notions of friendship and alliance between the two aggressive, ambitious
and resourceful countries served both well during the Cold War and its early aftermath.
Despite Putin's grand ambitions for Russia, only inertia keeps NATO intact now as its mission
is vague at best.

Germany sees itself as a major merchant state to the world and even fancies itself as one of
the premier democracies. As it veers toward breaking out of the post WW 2 cocoon it has been
in, it shall eventually have to define its place at the table of nation states. Its democracy has
not been tested in the fire as has the US's a number of times. As Germany asserts its
independence, the US has no choice but to let that happen and to adjust accordingly. We'll see
how Germany does and whether it can keep itself out of trouble. Obama, after some eye
opening visits to Berlin, sees Germany for what it is now, although the next US president may
try to rebuild rapidly fraying ties. 

In viewing recent US espionage the German political establishment has been puffed up with
sanctimony and has been throwing out the idea of how stupid the spying is. Older Americans
like me listen to the rhetoric coming out out of Germany and hear the same vain sense of  tactless
arrogance we have endured for generations. We are not your friends Ms. Merkel. Far from
it. So the US will go right on snooping.

SPX -- Waiting For A Correction?

The  SPX daily chart shows the the market has been playing "peek-a-boo" with corrective
action for a couple of months only to break higher and cream the shorts. SPX Daily
Look first at the successful little series of tests against the 25 day m/a in over Apr. / May.
Now look at the succession of scrapes with the 10 day m/a since Jun., all resolved in favor
of the longs.

I have argued in recent weeks that the SPX was significantly overbought on an intermediate
term basis and appears toppy (scroll down). But the insouciance of the bull traders has been
fun to watch: "Hey if you think it's overbought, watch what we can do with it. we can make it
more overbought."

More and more seasoned and successful investors have been coming out to say that a market
correction is due if not well overdue. But the minor sell offs see the bulls quickly regroup and
tenaciously push it higher.

 As of today,  the trend off the Apr. low is still intact with no breakdown apparent.

Liquidity Cycle

Peak US system liquidity growth (including the Fed's balance sheet) hit 11.6% yr/yr in late
2013. Through June it is down to 9.4% yr/yr and by year end 2014 it will be an estimated
7.1% yr/yr. The powerful growth of liquidity from late 2013 through mid - 2014 strongly
suggested faster economic growth through the year, and we have seen that in the monthly
data so far save for bad winter related weakness in early 2014. System liquidity growth will
perhaps slow further in 2015, so the economy and business profits may have less of a positive tailwind as 2015 develops.

As QE 3 zeros out, a major source of easy money support for the stock market will have ended.
The SPX rose 30% last year when QE was in full bloom, but is only up about 6.5% this year
despite a slower but still bountiful pace of QE. My view has been that the wind-up of this
large program by the Fed would suppress the market's p/e multiple and perhaps substantially.
So far this year, the SPX has held up pretty well especially given that players are factoring in
the cessation of securities purchases that are additive to Fed assets by late 2014. It is fair to
say that so far this year, investors have ceased aggressively chasing stocks, but they do not
seem to be very intimidated by the withdrawal of this major source of strength for the market
since the bull began in early 2009. That may change as the zero hour approaches late this
year, and it would not be surprising if it did. But for now, confidence in the economy and the
markets is holding up pretty well.

The US is still a heavily leveraged economy and the Fed went to large QE programs and a
ZIRP to keep the deflation wolf away from the door so as to avoid a downward spiral of
deflationary debt liquidation that would have produced a deeper depression. It has been five
years since the economic emergency that prompted the Fed's actions and although the
recovery has been slow, perhaps there is enough confidence throughout the system and its
markets that these programs can be laid to rest and more normal policies pursued. If it turns
out to be a case where short memory works to our advantage, my extra caution will have
been misplaced.

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.