Long Treasury Yield %

The long Treasury yield made an all time historic low in early July, 2016. As discussed since then,
this probably will rank in the very low end of Treasury yields going forward. Yields are being
pushed up by a mild acceleration of inflation which appears headed up to 2.0% yr/yr as well as
by speculation that the world's central banks are tiring of providing super accommodative
monetary policy. More specifically, Fedspeak has been threatening to raise the Fed Funds rate
in the near future.  $TYX

Despite the recent corrective uptrend in yield, the Long Guy has just reached the downtrend line
in place since late 2013 and has only recently crossed its 40 wk. m/a. So, a critical test lies ahead.
Note too, that crosses in yield above or below the 40 wk. m/a tend to be consequential.

The bond price tends to get oversold  for the intermediate term when the 52 wk. rate of change
in yield gets up +20%. I would also note that tougher dealer capital requirements and more
trader interest in this market have made it more volatile, and the rate of change in yield can now
go to plus or minus 40% on a 52 wk. basis. This means yield trend can be very much stronger
than in years gone by.

As a final point, a horizontal line has been set at 3.40% to signify where the long Treasury yield
would have to travel up to to signal that the decades' long bull market in the Long Guy might
be coming to an end. To get there, faster inflation would be in order as would more tightening
by the Fed. 

The Typical Stocks Bear Market

In recent times, the stock market has tended to carve out and extended top before the cyclical
bear arrives. The current cyclical bull has basically gone nowhere for two years. So, it gets
tempting ask whether the market is experiencing one of those periodic, lengthy topping periods
now.  SPX Weekly

It could be so, but the current period does not fit the the typical lead - in. What is missing of
course is the steady rise in short rates along with progressive flattening of the yield curve that
heralds the onset of a pre - recessionary liquidity squeeze / credit crunch. Some elements of a
problem are there. The Fed zeroed out the growth of its balance sheet and the monetary base
quite some time back and even raised the Fed Funds rate a notch last Dec. Moreover, Fedspeak
is leaning in the direction of another increase before long. But the supply of loanable funds now
provided by the private sector has been steadily growing faster than the demands of the real
economy because of low output growth and nominal inflation. Confident investors have drawn
on the excess liquidity to invest in and trade the capital markets. In addition, history shows that
even when the economy perks up, liquidity and the supply of credit can expand along with it
at least up to a point.

So, it would appear premature to write the market's obituary based on the fundamentals since
the traditional cyclical deterioration of the financial system and rate structure is not in evidence.
However, it remains troubling to me that the stock market and the economy have struggled so
obviously since the end of QE 3 as 2014 closed out, and that the economic system has been
saddled with excess business inventory for such a lengthy period.

For now, bond and stock prices are in softening trends as both markets come off the hefty
overbought conditions of the summer. Market players are seeking to find appropriate price
levels to accommodate another short rate increase. There may also be nervousness as the
election fight comes through the home stretch as well as some trepidation about how Trump
will behave in either victory or defeat.

Stock Market -- Fundamentals

The Fed ended its QE programs in late 2014. From a liquidity perspective, the US has experienced
stern tight money since then. I along with a few others warned that both the economy and the stock
market could be damaged following a large, cumulative QE program as occurred in the few other  instances when major QE was halted. From the latter part of 2014, US business sales fell  from
a 7% yr/yr rate of growth down into negative territory by the end of last year and nearly went
into recession before stabilizing. Business sales and profits were also damaged by the oil price bust
which took place over the same period. Since new business orders spiked high in late 2014 / early
2015 just as sales momentum turned down, the economy has carried excess inventories ever since.
Super low shorter term interest rates make it easier to carry inventories, so the holding of large
stocks has continued to suppress economic demand. Over this period, SPX net per share has fallen
from about $115 to $98 in 2016. Overall, the economy did not fare that badly, as the Fed wisely
kept interest rates at historic lows.

The stock market did better than profits since late 2014. The SPX is currently about 2.4% higher now
thanks to a premium dividend yield compared to short rates and Treasuries and exceptional investor
and trader confidence.

Looking out a year, most players are mildly bullish, expecting the SPX to grind modestly higher on
a positive bounce in earnings sufficient to overcome worries about upticks to inflation and short
rates.

This is a risky environment. There is no liquidity tailwind from the Fed. To avoid a sharp economic
contraction and deeper weakness in profits, excess inventories will need to be worked off slowly.
Such measured inventory policies rarely happen. Inflation will need to be modest enough not to
pressure household incomes too much. Finally, the post - election period will have to yield promise
of either fresh fiscal stimulus or the introduction of a new avenue of monetary easing to assure a
degree of economic rebound. 

It is not easy to thread a needle.

SPX Weekly

SPX, Long Treasury, Oil Price -- All Quickies

SPX
The fairly strong overbought of Jul. - Aug. has been wiped as the market continues to exhibit mild
corrective action. The uptrend line in force since Feb. of this year has been broken and this remains
a source of concern as is the negative controlling force of the 25 day m/a. The SPX has however
notched a double bottom this week and it remains to be seen whether it can rally more forcefully
off that 2125 level or whether further ground may be lost. Quick little swings in sentiment concerning
monetary policy for the remainder of 2016 appear to dominate the action.  SPX Daily

My proxy for US business sales through Sep. rose a paltry 0.5% though pressure on earnings may be
subsiding as weakness in oil / gas comparisons should continue to grow more shallow. Output from
the mining / extraction / minerals sector was down a sizable 9.4% yr/yr despite modest improvement
in recent months, but pricing in this sector is less awful.

Capacity utilization in the US. is only 75.4%, unheard of in the modern era for an economy that has
been expanding for seven years and the data has to be unnerving to the Fed.

Long Treasury Yield ($TYX)
The long T-bond yield has swung up since early July probably mainly on talk of eventual Fed
tightening. Note as well that the yr/yr % change in CPI inflation has continued to inch ahead with
Sep. standing at 1.5%. Under the most charitable conditions, the long term yield premium spread
of the Treas. vs the CPI would dictate a 3.5% T-bond yield presently. Continued very low real
growth of the economy and large capacity slack has been keeping the yield near historically
low levels.  $TYX Weekly

The long Treasury was very overbought in early July and this position has eased very substantially
in recent months. Thus despite the talk of further monetary tightening and the slow push on
inflation, some traders may play on the long side and it will be informative to see if they push the
bond down enough to reverse its uptrend.

The bottom panel of chart shows the relative strength of the stock market vs the long Treasury.
Note that since QE 3 ended as 2104 ran out, The bond has done about as well as the stock market
on a price basis as bond players correctly gauged that elimination of QE programs would suppress
economic growth and that the blowout in the oil price would contain inflation.

Oil Price
With peak seasonal driving for the year having past, oil has entered a period when the price can
be seasonally very weak right into early Feb. of the succeeding year. Net oil producers could
well hit another period when oil revenue inflows tumble unless they can convince the market
that a strong agreement to limit future oil output can be hammered out. Failing that, WTIC
crude could zip down from around the $50 bl. level right along to $35 - 40 by early this coming
Feb.  $WTIC Crude 

Note that oil has held its uptrend since Feb. of this year. So the test of producer credibility lies
dead ahead. A tumble in the price would further devastate the finances of net producers, probably
bother the SPX and could give the market for top quality bonds another reprieve.

SPX -- Daily

The stock market ended the latest upward thrust in Aug., when it became overbought on both short
and intermediate term bases. Weakness since the outset of Sep. could be attributable to a work off
of the overbought condition, but extension of a dip here in Oct. sees the market entering more
perilous territory. The indicators have weakened; the SPX has had trouble breaking through a
falling 25 day m/a; the uptrend line in place since Feb. has been violated. Thus, we have red flags.
SPX Daily

Bad enough the Fed has been keeping up the hawkish patter on the outlook for short rates. Now
a broad range of fundamental issues have increased player anxieties including the Deutshebank
meltdown, new worries about how troublesome Brexit may become, concerns over earnings, and
the sudden fractures within the GOP just a few weeks ahead of the elections. The latter represents
a rare disruption for the idea of a stable two party system, and with The Donald talking nasty
in the wake of his recent "grab them by the pussy" video, freakish debate performance, and GOP
desertions, the party, long a bulwark of US political life, appears in crisis. A novel uncertainty has
presented itself. All of this has come to pass during the latter stage of a jittery seasonal period.

The market is slightly oversold. For the SPX, there is important short term support at 2125. Breaks
of trend are not to taken lightly. Consider also the NYSE a/d line which shows vulnerability as well.
NYAD Daily

Gold Price

Back on Jul. 10, the argument here was that the price of gold had hit an intermediate term overbought
on record speculative interest in the futures market. Despite the glaring technicals, the price held up
reasonably well until the last several weeks when market sentiment, observing a firming of the USD,
began to deteriorate as players encountered a fresh round of Fedspeak concerning the readiness of
the FOMC to raise short term rates before long (Dec. probably). The fundamentals remain ever so
mildly positive, but the gold price had so wildly over discounted them that a fast negative reversal
in gold's fortunes has rapidly ensued. Gold Price -- Weekly.

The sharp sell down in gold has eliminated the overbought position and the heavy premium to its 40
wk. m/a. Speculative long positions in the futures market are rapidly evaporating but still remain
elevated. The fundamentals ex. the USD have firmed up a bit more with a recovering oil price
leading the way. The dollar still has some short term upside before it hits an intermediate term resistance level. With plenty of chatter out there about the world's major central banks experiencing easing fatigue and a very unsettled UK pound market, it may be necessary to give the gold price a degree of downside leeway to important support at $1200 oz. In addition, since the recent price weakness in gold broke a nice uptrend line running back to late last year, there may be further, belated downside action in gold.

Going forward, it still pays to watch the US economy and whether further expansion is strong
enough to support a mild acceleration of inflation. True, short rates may rise gently further in
such a situation, but there is no guarantee whatsoever that the USD will follow rates higher.
If so, that may give gold another shot at redemption. And, who knows, if Der Trumpy wins
the election the gold guys might like that.

SPX Monthly -- Brave New World

I have long had substantial respect for the monthly SPX chart, especially the MACD indicator.
Crosses in this measure have proven to be useful guides to future results for the market because
whipsaws have been few and far between. Monthly MACD is in the second panel of the chart:
SPX Monthly

The negative cross in early 2015 tipped off well the 15%+ decline that followed late last year and
carried into early 2016. Now there is a positive cross which confirmed the rally to new highs just
a short while back. The SPX reached an intermediate term overbought this summer, but if the
monthly MACD is taken at face value given its history, the market should trend higher for a period
of months going forward.

Looking from a reasonable perspective, how could this happen? Well, there could be a trend
extension continuation pattern based on the assumption the economy evades recession but does
not grow rapidly enough to foster a significant rise of inflation and a sustainable upturn in short
rates. Or it could be the result of a stronger economy and rebounding profits sufficient enough to
offset the hit to the p/e ratio from a program of gradually rising short rates and somewhat higher
inflation coupled with a degree of rotation out of bonds into stocks. The latter case would signal
the economic expansion was moving into a more mature phase when stocks can certainly rise.

The secondary fundamental indicators I use for the market have cleanly supported the rise of
the SPX since early this year, but implicit economic performance has fallen enough below par to
warrant caution in making either market or economic predictions for the year ahead.

There is growing chatter in the financial press that a Trump election victory could lead to a price
correction in stocks of 10% because it would represent, speaking euphemistically, a wild card.
But if the consensus of market players continues to support a Clinton victory, we could almost
as easily see a pull back on the premise of 'buy the rumor, sell the fact' as players focus in more
carefully on what a Clinton victory might really mean for the economy.

There is an old New Yorker admonition for times like these: Don't be no hero.

Stock Market

Fundamentals
The cyclical bull market that started in early 2009 remains in place. But, it is an uncomfortable time.
My forward looking weekly cyclical indicator has been nicely on the rise since Feb. '16, in line with
the current up leg of the market, but the customary positive follow through for the economy and
for profits suggested by the indicator has fallen far short, leaving the market to advance primarily
on a nominally rising dividend, yield premium to cash equivalent and Treasuries, and a very low
inflation rate. Players call this "TINA", short for "there is no alternative". The idea is that with the
Fed holding interest rates so low, there is not enough competition for stocks. So far since the
latest leg up started in Feb., the premium p/e ratio, hyper extended position of the current price
level, and stagnant earnings have increased anxiety but have not knocked the SPX off of its uptrend.

With Fed members talking about raising short rates before long, the rally has lost positive
momentum and players are also wondering about the outcome of the upcoming election as well.
Since my forward looking economic indicators are not working very well at this point, I am not
about to step out of character and start making market predictions. When some useful clues come
around, I'll reassess. The stock market does not owe us a thing at this point, but I hope the economy
owes us some stronger performance.

Technical
The SPX continues to work off the overbought levels hit this summer and the indicators show mild
deterioration.  SPX Weekly

Oil Market / Price

Sep. is one of the strongest months for the oil price on a seasonal basis. The rally fizzled again this
this year, with large speculators exiting trades. The scenario I have followed called for oil demand
and supply to come into balance by the end of 2017, despite likely outsized inventories. With a
slower pace of global economic growth so far in 2016, oil demand is running below initial
expectations, and with supply still growing at a high rate, the inventory pipeline is susceptible
to filling further. With a nod from the Saudis, talk is now swirling around the idea of some kind
of global production ceiling if not a cut. It could happen, but 50 years of history teaches to be
careful of this kind of talk in the wake of major price busts.

I played the long side of oil over the winter / spring of this year but have been suspicious since
mainly because of the near historic long side speculative interest in the crude future. Heavy long
side interest is subsiding quickly now, but it is back to the drawing board for me as there are
question marks concerning both global supply and demand looking out 12 months. Since the big
traders and hedgers in the market get more intelligence faster than the rest of us, one rule of
successful trading in oil comes to the fore: Oil is volatile, so do not bother trying to catch tops
or bottoms, but concentrate your research when trend develops instead. Whipsaws happen, but
since oil tends to trend, spotting change can be profitable even after its price direction has
begun to establish itself.

With the peak driving season in the northern hemisphere now wrapped up, oil is set to enter a
strong price downtrend on a seasonal basis.Thus, the large swirl of talk about limiting output as
another sharp downturn in price would add to the severe economic damage net oil producers
have already sustained. Stay focused on the news.

WTIC Weekly

SPX -- Daily

With a sharp, short time duration sell off early in the month followed by a fast double bottom
just above the SPX 2125 level, the market is attempting to rally off a moderate price momentum
oversold condition. A rise in short rates has been pushed further out in time, so stocks and bonds
have some breathing room to the upside. If you are long the stock market, next you will want to
see if any further progress is sufficient to reverse the downtrends in SPX RSI and MACD.
SPX Daily

Monetary Policy

Despite intimations from Fedspeak that an increase in short term interest rates is in the pipeline,
recent economic data through mid - Sep. turned weak and left the Fed having to again postpone
further tightening of policy. This being a national election year, the incumbent party wants to
show economic data at its best right before the vote, so a snap back in Sep. data to be released
next month cannot be ruled out. If that is not feasible and weakness continues through the
month, the GOP could win the presidency and trigger off a wide range of interesting discussions
about the economy after election day.

Be that as it may, the classic case for tightening monetary policy further is not in place, and we
have to wait and see whether incoming economic data released next month improves. If such is   
the case, then after election day the Fed will have a freer hand with policy.

Long Treasury Price (TLT)

Back on Jun. 20, I argued that the long Treasury price was steaming along up to a major overbought.
With long Treas. yields still near all-time lows, prices are still near highs. Years out and looking back,
these price levels will very well likely be in the top tier of the long term range. Positive sentiment is
still fairly strong, so it could be a stretch to say that the latest run up in TLT from the spring until
recently was a blow off top.  TLT

The recent volatility in the bond market appears to be fueled more by expectation than short term
on-the-ground fundamentals. Whatever the Fed does this week with short rates, Fedspeak wants
to keep the issue of eventually raising short rates in the headlines. Players may also be looking
toward 2017 when a slow economy may lead a new president to push for significant fiscal stimulus.
This election year has introduced the political elites to the fact that the silent, primarily white,
majority is angry, vocal and demanding. These folks are leaning in hard on people and programs
which might make their economic lot better and more secure. This all could translate into
incremental deficit financing at the federal level starting next year. Infrastructure repair and
development programs coupled with tax relief and other stimulative measures, if large enough in
scope, could foster somewhat faster real growth, stronger inflation and a larger Treasury bond
calendar. In such an environment, the Fed would support higher higher rates and further upward
pressure on bond yields would ensue.

Now, the hard truth is that the bond market is not comfortable looking out even this far, but with
nearly everyone suspecting that yields are at or near all-time lows, and armed with the additional
knowledge that so many folks are pressing for better and more financially secure times, it is not
unrealistic to think that bond players are looking out past the ends of their noses.

If so, the bond market could be tougher to 'read' than usual in the short run and there could also
be more volatility as a result.

SPX -- Weekly

Technical
The SPX has weakened recently, but is still holding an uptrend from this Feb. based on weekly and
daily closing prices. An intermediate term overbought condition is being relieved and the break in
the MACD pattern should be source of concern, although whipsaws do happen. The market is
still supported by a rising 40 wk. m/a, but note the loss of positive momentum. The volatility index
(VIX, bottom panel) is trending up but is not at a threatening level by long term standards.
SPX Weekly

Fundamentals
Conflicting Fedspeak has whipped the market around. The FOMC meets shortly and Their trial
balloons suggest the market would not take kindly to a rate hike, especially with weakness in
recent key economic data such as the readings for the PMI's and retails sales. The fundamental
case for hiking rates does not exist, but the Fed faces push back nonetheless.

Trump's reminder that he plans to remove Janet Yellen from the chairmanship of the Fed if he is
elected does not seem of great concern to the market right now, but the type of cavalier criticisms
of Yellen he has offered would sow uncertainty and confusion in the markets if he becomes
president and plays this type of game.

SPX -- Daily

For the past month or so the argument embedded in my equity market posts has been that the market
was overbought. Since more voices were added to 'Fedspeak' in favor of raising short rates this week,
corrective action in the stock market was taken today. Louder 'Fedspeak' has cast a chill since the
most recent reports of economic activity have shown a softening with sudden, across the board
weakness in PMI new orders data reported. The new Fed concern is that continuation of super low
short rates may contribute to capital markets instability. So, the Fed may be about to create some of
the feared instability off its own bat! Whatever, the markets were taken by surprise, with the SPX
dropping sharply.  SPX Daily

In one fell swoop, the SPX has entered mildly oversold territory on a short run basis. With the
sudden advent of trader crankiness, all the profit takers may not have unloaded yet. Of interest
is that the uptrend line from the Feb. low is at about 2110 and a break below that line of support
could trigger more concerns in the market.
-----------------------------------------------------------------------------------------------------------------------
My strategy with stocks has been only to go long on deep oversolds such as occurred last autumn
and earlier this year. Viewed longer term, the market is once again hyper-extended and overvalued.

There is another personally troubling aspect about the market as well. Stocks are attractive when
the market is priced to return 10% (including dividends) annually over the long term. With a
slow economic growth environment, best I can figure is that stocks are priced to provide only a
6% long term return which presents an an unsatisfactory picture for risk capital.

Gold Price

Back on Jul.10, I argued that the gold price was overbought on an intermediate term basis and
that speculative long side interest in the futures market had reached record levels. Gold did
sell off in uneven fashion through the end of Aug., but has recovered sharply and partially this
month as traders view further Fed tightening and prospects for a another  bounce in the dollar
as now on hold.  $Gold

Gold has been choppy over the past two months, but has managed to hold its uptrend since early
this year. The chart shows that $1375 is the new resistance level. The market has lost only a
portion of its overbought status and speculative long side interest remains zealous although it has
eased somewhat. The cyclical case for gold remains but wanly positive. In the meantime, traders
are focused on the Fed and the short term outlook for the US dollar. Tough to make a call here.

Here is a link to the Jul. 10 post: Gold, Silver Overbought

Stock Market

Market Breadth
In terms of advance / decline. the market has enjoyed a very strong positive move since the winter.
However, breadth has moved into an overbought position currently when measured in terms of RSI
and against its 40 wk. m/a.  $NYAD Weekly - Cumulative

Notice that in recent years, when breadth RSI gets into overbought territory, as it is currently, both
breadth and  prices tend eventually to get choppy and show some vulnerability (RSI is the third
panel on the chart). Note as well the commanding premium the a/d line now has over its 40 wk. m/a.,
and the commanding slope of the a/d line itself. The trajectory of the a/d line has carried long enough
to be bullish for the intermediate term. It signals a strong impulse, but is now quite extended. The
MACD measure, which has nicely underscored the market's advance since Feb. is also now tending
to flatten.

Selling Pressure
A rising TRIN measure signals the volume of declining stocks exceeds that of advances. By this
indicator, the market is coming off an intermediate term overbought, but the trend of the TRIN
indicator has not as yer reversed to show development of  a weakening market.  $TRIN

As always, remember that an overbought market reserves the right to get even more so.

Oil Price

I have kept it very simple on playing the oil market this year and have stuck religiously with the long
term seasonal pattern. There was a terrific long side trade in the market during winter - spring
this year. I have backed off since, and skipped the market when West Texas crude dropped as
expected down to $40 bl. in early Aug., which is normally a choppy month. Traders know that
from a seasonal perspective, the oil price tends to have a strong positive run in Sep. and have
been positioning for it during Aug. Traders also know that the oil price tends to weaken seasonally
from Oct. through the following Jan. and some are advising clients to begin shorting the market
in late Sep. as oil demand drops after the northern hemisphere driving season winds down. Fancy stuff. 
WTIC Weekly


The chart shows resistance now at $50 and the market must clear this hurdle to rise to $60,which
would be the next substantial hurdle. The market also must clear $50 to confirm that the uptrend
that started in early 2016 remains intact.

The concerning factor here is that bullish money down sentiment in the futures market has risen
again toward near record levels. It strikes me as odd that speculative interest in oil should be so
strong and have recovered so quickly after the price blowout in 2015. Running with the large
speculators  on the long side when they are going hot and heavy has not been a wise
practice. For my part, I'll skip the long side seasonal trade in Sep. and see what the lay of the
land is later in the autumn.  Finviz Oil future

Long Treasury Bond

Fundamentals
Yield directional fundamentals turned in favor of higher yields (and lower prices) much earlier in the
the year, but since the improvement in cyclical factors has so far proven very mild, the bond has been
able to maintain both long and intermediate term downtrends despite the sharper incidence of
volatility.  TYX Weekly

The long Treasury yield shrugged off the first increase in the Fed Funds Rate (FFR%) back last Dec.
and by 'Fedspeak', may face another two increases in the FFR% in the months ahead. It remains to
be seen whether the Fed will follow through on raising the FFR% at all this year, and whether the
bond market would see such a maneuver as being pro - recessionary. Nonetheless, with industrial
output having recently accelerated, and with future inflation pressure gauges still advancing, bond
traders may be more cautious near term. Also, it might be wise to watch how the US Dollar reacts
to much more hawkish Fedspeak, as a rising dollar could short circuit some of the inflation pressure
which could arise from a faster growing economy.

The bull market in the long Treasury now exceeds 30 years, and with lower economic growth and
inflation in place over that period, traditional yield premiums in the structure of the Long Guy
have been largely stripped out. The market for Treasuries and high quality corporates has fully
embraced this era of low growth and inflation as the norm.

Technicals
Let's refer back to the chart. Increased financial regulation now limits exposure of primary capital
used by intermediaries to make markets in fixed income securities. With the bond market having
grown dramatically in size over the years, liquidity is eroding and volatility is on the rise. Even so,
my experience remains that the more Treasury yields drift up or down from the 40 wk. m/a, the
more one should think about hazard or opportunity as reversion to the longer run m/a is very
common. Notice how the negative spread for the bond is now narrowing after growing large at
the end of Jun. As well, I would argue the bond remains overbought when viewed against the
52 wk. ROC% in yield.

Also attached is the chart on the long Treasury ETF, which suggests the price may be entering
pullback mode for the intermediate term.  TLT Weekly

SPX -- Daily

The SPX daily chart is overbought on an intermediate term basis, but it is not a screamer. So, if
no happening suddenly jolts market player confidence, the charts say the SPX can drift higher
or perhaps consolidate, in the weeks ahead. SPX With Intermediate Term Indicators

The combination of an extended advance in stocks since Feb. coupled with a seasonal period
that gives any number of veteran traders and investors the jitters is giving rise for calls of an
interim top, and perhaps, one that is just over the near horizon.

From a fundamental perspective, I do not see the Fed has warrant near term to raise short rates
again and the private sector is generating more than sufficient liquidity to fund modest economic
growth. The one caveat at this location is that since the market has behaved very much in line
with my forward looking weekly cyclical indicators so far this year, it may be worth noting that
that the composite of the indicators has recently began to level off, which carries a preliminary and
inconclusive suggestion that the present improvement in the business environment could well
level off later in the autumn.

Consider this, too. From a seasonal perspective, the oil price has behaved relatively nicely compared
to its pattern this year. Should we see further harmony in the weeks ahead, the oil price should
rise seasonally through Sep., and this could give the stock market a boost.

Monetary Policy

The classical case for a Fed rate hike remains absent. Cyclical pressure within the economy has
increased lately, but remains suppressed with a few indicators such as capacity utilization %
consistent with a mild recession. My short term credit / supply demand reading remains at a
mild +5 in favor of demand, but there is sufficient private sector growth to fund the needs of the
entire real economy with excess to spare. The CPI was up only 0.8% yr/yr through Jul. Moreover,
a key element of my inflation pressure gauge, the yr/yr % change of the CRB commodities
index, has improved from a dramatic -30% seen since early 2015 to a negative 1.05% recently.
The trend of this measure is signaling higher inflation eventually, but it has been a slow rise so
far.  CRB Weekly

Through July of 2016, my proxy for US business sales is up just barely on a yr/yr basis to +0.3%.
In more normal times, when cyclical pressures are on the rise, this measure might be expected to
be 6 - 7% ahead of the prior year.

Ms. Yellen is scheduled to speak next week at the annual KC Fed junket in Jackson Hole, WY.
She probably can get way with an extended rehash of recent Fed views on policy, but unless
she can offer some assurances how nicely the economy is set to perform over the next year, it
would be helpful to develop a wider discussion on further Fed options and the issue of federal
stimulative measures.

SPX -- Weekly

Technical and Psychology
The SPX remains in an intermediate term uptrend following the breakout above 2100, which has
extended the market up into new high ground. The SPX is losing positive momentum and has
been progressing toward a substantial overbought, although it is not at extreme levels yet.
SPX Weekly

From a seasonal perspective, mid - Aug through the end of Oct. is a time in the year when traders
become jittery with all veterans able to tell horror stories from the past. Players are also concerned
about whether this year might see troublesome uncertainties regarding the upcoming election.
Since one wheel has come off the Trump bandwagon at least, anxieties may be tamped down for
now, but rest assured, efforts will continue to get The Donald squared away before it is too late.
Remember too, that there could be some zingers headed Hillary's way.

The bottom panel of the chart shows the VIX or 'fear index" has dropped down to levels consistent
with investor complacency. In sum, with the SPX nearing an intermediate term overbought, extant
signs of a more relaxed 'investorate', and the temporal progression toward a more jittery time for
market players, expect more calls for an interim top in the market.

Fundamentals
The business environment has been improving slowly, and SPX net per share finally turned up
in Q2. Twelve month SPX eps has recovered to $98.75. The market remains expensive on the
basis of old fashioned fundamentals. As testimony to how hard a slog it has been on the ground
for business, SPX profits now stand only about 7.5% above the highs seen in 2007 right before
the roof started to fall in. 


 

Stock Market -- Longer Term Issues #2

For more years than I care to remember, I have worked on the assumption that, over the long pull,
US business would grow about 6% annually. The figuring has been 3% real growth in output of
goods and services and 3% in pricing gains (inflation). This assumption has served well in many
ways, but now it is threatened. The 3% real growth factor has been based on a combination of
projected gains in the labor force plus productivity increases. In recent years though, labor force
growth has decelerated to about 1% per annum and productivity to below 1.5%. Moreover,
business pricing power has fallen well under 3%, down to 1%. Now, US business sales growth
potential is but 3.5%. If profit margins hold up, earnings should also grow by 3.5%, and if you
want to earn 10% on risk capital, then the market p/e ratio must rise steadily or the dividend
yield must be substantially higher or some combination of the both must obtain. Nothing will be
tidy or welcoming here.

Many investment strategy commentators, now mindful of seemingly more modest growth ahead,
are saying that the market is set to deliver lower, but positive returns going forward and that it
is time to set one's sights on the prospects for more modest total returns over the longer term.
But, they say, this is still bullish, since the returns on high grade bonds and Treasuries will be
lower than for stocks. If this be true, my reaction would be to not bother with stocks or bonds
except under rare conditions and focus your attention elsewhere.

The liquidity to support faster growth and higher inflation is there.With operating rates just above
75%, there are ample physical resources to support faster economic expansion and to trigger
faster capital spending to keep up as needed. The work force remains seriously underemployed
and if the US presses on, businesses will find ways to bring the longer term unemployed off the
sidelines, and in Washington, pressures can be brought to bear to create a balanced program of
of increasing immigration based primarily on skills and much less so on ethnicity. If needs be,
there are a range of fiscal initiatives that can enacted to spur growth and tax policies developed
to help finance such programs. This is easy stuff for sensible people to do for Christ's sake.

So, I am not ready to buy off on a new 'era' or 'paradigm' of low everything and since no one
is paying me to chart the fortunes of the US, I am at liberty to move on from this blog to other
stuff if people do not start to wake up and fly right soon. 

Stock Market Sentiment

Stock market sentiment turned bearish about a year ago and despite the extended rally in the market
since Feb. of this year, finally began to turn more bullish as we entered Jul. of this year. The equities
put / call ratio shows players are bearish when the 30 day m/a is above .70 and that they are too
bullish when the put / call falls to around the .55 level  $CPCE

From a contrarian perspective, investors and traders should be thinking about the long side of the
market when the p/c is at .70 or above and be looking to lighten positions when conditions are
frothy at .55. I use a crossover of .625 to demarcate the bull / bear sentiment line. So, sentiment is
currently edging toward bullish for the first time since mid - 2015, although it is well above the
.55 line, when everything is deemed to be coming up roses. From a contrarian perspective, the
market is edging toward an intermediate term overbought.

Net selling pressure in stocks hit an important interim peak in the late summer / autumn period
last year when the market began a period of intermittent sell downs that lasted through mid - Feb.
of 2016. The selling pressure for NYSE stocks has abated steadily since then, and as measured
by the 30 day m/a of this gauge is now entering overbought territory for the first time since Apr.
of last year. Net buying pressure holds forth presently and it can certainly persist and strengthen
from here. But note that on a 30 day m/a basis it has not done much better than currently over
the past five years. $TRIN

Note as well, the 30 day TRIN chart indicates a deep oversold when selling pressure rises to
1.50 on this indicator.

SPX -- Monthly

Early in 2015, I made a big deal out of warning that a downturn in the monthly MACD indicator
for the SPX did not bode well for the market outlook. And, it did not as the SPX dropped rather
sharply on three occasions through early 2016. This Aug. is far from complete, but to be fair, it
is worth noting that the SPX monthly MACD (middle panel of the chart), after falling sharply, is
now struggling to gain a positive reversal.  SPX Monthly
  
Look, this move up in the MACD shorter term line may be just a quirk, but evidence over the long
term suggests the possibility of significant directional change for this monthly indicator is often worth
attention and interest. What, beyond merely freakish speculation, could sustain a rising market?
One argument would go as follows: The US economy will gradually regain expansion momentum.
the Fed will commence raising short rates very slowly. Because there is still slack in the economy,
not only will profits begin to recover, but market players, seeing potential for further growth, will
rotate out of bonds into stocks as they anticipate weakening bond prices and some upside in the
equities market. This development is what the range of my favorite economic and market indicators
suggest. We need to see some further improvement in the US economy and perhaps, some measures
of fiscal stimulus with a new administration in Washington in 2017 and, of course, a degree of
panic in the world's bond markets which are widely overvalued on a longer term basis.

As long as my indicators provide support, I will probably stick with this view for a while, even
with recognition that stocks are already overvalued as well as noting that there are a growing
number of social, economic and political dumpster fires around the world. Besides most of the
old guys out there like me are so reserved in their thinking, that a contrarian 'last hurrah' fits
my love of irony to a T.

Oil Price

The last post on the oil price was back on May 23, when it was argued that oil was vulnerable on a
seasonal basis. Oil did enter a seasonal decline and it was also mentioned that the bulls might wait
until the end of July before dusting off the chart. So, here we are.

There are things about the spring - early summer weakness in the oil price that are a little bit
disconcerting. First, long side speculative interest in oil when the price rallied up near $50 bd. was
very nearly at record levels. Bullish, money down sentiment was way too strong in a market when
the fundamentals suggest a careful, tentative approach to rallies in view of continued sizable global
inventories. This may have set the market up for a larger than expected seasonal flop of  nearly 20%.
Second, the intermediate term weekly chart showed the first nearly strong overbought for oil in
several years. $WTIC Weekly Third, the MACD reading has turned negative, and the 40 wk. m/a
no longer supports a rising market. Since Aug. can be a choppy month seasonally, long side traders
may hold off on significant new commitments until later this month. It may also be the case that
the Brexit induced rally in the US dollar bothered oil players.

The recent heavier than expected pressure on the oil price as speculative longs are run off suggests
that even if oil gets its big and final annual seasonal lift over Sep. - mid-Oct., the price recovery may
well fall sharply short of the $60 level that looked like a 'do' earlier this year.

Liquidity Cycle

With the Fed's balance sheet and the monetary base now flat for the past 18 months, the private
sector is the primary provider of liquidity to the system. Total private funding measured yr/yr has
moved up to 5.6%. The banks are not avidly chasing liquidity with jumbo deposits down slightly
and commercial paper offerings running flat and way below pre-recession levels. With short term
interest rates at nominal levels, M - 1 money supply has been growing nicely as folks have
little incentive to move funds out on the curve. With the Fed not providing any tail wind, risks
to the capital markets are elevated, but given the modest needs of the economy, there is excess
liquidity to fund speculation in the capital markets as long as confidence holds up. Recent economic
data suggest the economy is firming up, and if a strengthening trend is developing, excess liquidity
will decline and the Fed may ultimately wish to raise the Fed Funds rate again. Short term lead
economic indicators support this view, so one has allow that investor and trader confidence may
receive a challenge in the months ahead. If the Fed begins to telegraph this view, players may
again shorten maturities enough to actually shrink the monetary base and give some traders a scare.
However, since the economy is still well below levels suggesting the development of an overheating
situation, the Fed may maintain an extended purview to encompass international issues such
as Brexit etc. and leave off any warnings for now.

As 2015 wore on, markets players took about $170 billion off the tables, but with stocks and
bonds higher in 2016 so far, that money flowed back into the markets. Given the relative
stability of money market funds in recent years, market action in the short term may continue
to be rotational pending news from the Fed.

SPX -- Weekly

Fundamentals
My weekly cyclical fundamental indicator turned up in Feb.'16 and continues to improve. The
inflation pressure gauges also turned up during the winter and are trending higher, although the
recent firming of the US dollar has trimmed the momentum of the gauges. The business strength
indicator is now firming, but remains below levels that signal the building of broad cyclical
momentum and pricing pressures in the economy. In, sum, the environment for business sales
and profits is getting better but is still subdued. The idea that the stock market can rise further
even though growth is restrained because inflation and interest rates are so low is gaining an
ever wider audience currently but is far from 'gospel'.

Back in my college days, and after an evening out, we would hit the old Blue Comet Diner in Bryn
Mawr, PA. We would order medium rare cheeseburgers and home fries, and if we were feeling that
a bit of extravagance was deserved, we'd go for having gravy ladled out over the burgers and fries.
To the point, if the 2009 - 2014 phase of the bull market was the burger and fries part, the
current market is the gravy. That's about as serious as I can be, at least for today.

Technical
The chart is nicely positive and has extended the rally from Feb. to new highs. The SPX is headed
for an intermediate term overbought but is not there yet in a robust fashion. Interestingly, the SPX
could fall sharply to the 2040 area before the current uptrend was violated.  SPX Weekly

Thoughts On 2016 National Election #2

The Democrats have made significant progress on trying to integrate the left-of-center wing
(Obama, Clinton) with a young, revived progressive wing (Sanders). They plan to join forces to
combat The Donald and the GOP, and have reached extensive compromises on party platform
and policy. It is still early to tell whether Bernie's people will gravitate into the party or remain
aloof, seeking to form a new base for the election in 2020. Hillary, for her part has been pulled
way left from where she stood a year ago. If she is elected president and begins backsliding,
the party's unity may unravel as Bernie and Elizabeth Warren may get right in her face if she
does not co-opt them. It will be critical for Hillary to court those younger folks who are
debt burdened underemployed college grads and are moving into the family formation years.
It will not be good enough if the Democrats stick only with older liberal whites and Afro -
Americans and Hispanics. In turn, young, progressive  folks need to behave themselves if
they protest the Trump campaign as now seems likely.

The GOP has made no progress toward unifying the establishment and its elites with Trump's
hard right, strongly nationalist followers. Trump blew a hole in the GOP establishment, showing
them to be interested primarily, if not exclusively in serving the needs of the rich and very
upscale. The GOP elite has so far shown itself too purist and hidebound to accept these folks
and Trump, ever the egomaniac and demagogue, has yet to introduce positive ideas to his
dis-affected white followers, preferring to play on their fears and prejudices. He may never do
so even if he wins the presidency, leaving it to others within the party who must "discover" all
the many loyal mid and downscale Republicans and how they have been betrayed by the
guardians of the wealthy.

The old Chinese curse is heavily upon us: We live in interesting times.

Better Lucky Than Smart

Back in a post on Sep. 27, 2015, with the SPX trading below 1900, I claimed that the SPX could
close out 2016 at 2160 or even a little higher. Folks were not bullish back then, so it was a nervy
call. Moreover, since 2016 is not over yet, who knows whether the SPX, now at 2161, will hold
up. Even worse, the reasoning behind the call was not strong, since the US economy and SPX
net per share has under-performed my expectations for the year by a wide margin to date.
Nevertheless, with the economy just starting to do a little better now, I am going to take some
credit. But there may be a cautionary moral here.

For old timers such as me, who know even that the market can hold up when the oil price tanks,
the suppression of earnings since late 2014 borders upon unnerving. Profits potential for the SPX
companies is finally improving, but top line or sales performance is still very subdued and it is
fair to say that market players ought to be more concerned than they are. Since the 1960's, it
has been popular to hold to the idea that the SPX p/e ratio varies in inverse relation to how the
inflation rate is performing in the economy. In this case, the very low CPI is translating into an
elevated p/e, buttressed surely by historically low interest rates. But the p/e ratio has historically
been a measure of investor confidence, too. If the low inflation and interest rates reflected an
economy that was expanding decently fueled by strong productivity growth, may be one need
not worry about a high market multiple. But the economy has moved along only slowly in a
shaky global environment with increasing social stresses evident. One can make the case that
there may be more monetary easing and even some fiscal stimulus ahead, but in classical terms,
one can also argue that the SPX is already discounting a sizable profits recovery, and one is
free to wonder what the market, strong since earlier in the year, can do for an encore near term.
SPX Daily

SPX -- Daily (2152)

The post Brexit rally since late Jun. has brought the SPX to record closing highs and has extended
the uptrend underway since Feb. of this year. The B of E stands prepared to provide additional
liquidity as does the ECB. The Fed has been standing down from further tightening and doubtless
stands ready to provide dollar swap lines if and as needed. The Brit. Gov. may be fashioning
fiscal stimulus plans, the Clinton platform has stimulus plans and a Trump presidency might lay
out trickle down tax cuts. Short rates and bond yields remain near historic lows. US forward
economic indicators have been positive since Feb. and all the happy talk about monetary ease
and new fiscal stimulus programs has for now relieved the market of its dependence on rising oil
prices.

I have raised my fair value model, based on the longer term earnings trend and earnings plowback
percent, to SPX 1990 -2120 to stand through mid - 2017. SPX net per share must rebound sharply
from below $100 to near $130 by the end of 2017, and plowback, now suppressed by weak earns.
must rebound. The SPX has sailed above fair value primarily because inflation has remained so
low and because bonds are regarded as uncompetitive. There is a wide reservoir of patience for
earnings to recover.  SPX Daily

Out of it all, it is super low interest rates and inflation that has contributed the most to make
SPX behavior haywire by historic standards. The p/e ratio reflects supreme investor confidence
that all will wind up to the good. (There is also the small matter that no one pays equities
managers for having very large cash ratios when there is any life in the market.)

Gold, Silver -- Overbought On Record Speculative Interest

The cyclical economic and inflation case for these metals is ever so mildly positive. However, Brexit
has helped trigger upsets and concerns ranging from the British Pound and the Brit property market
to the solidity of the EU and the stability of the euro banks. On top, the Yuan has been weakening
again. Safe haven demand for gold has been on the rise and the silver market is being carried up
with it in classic 'poor man's gold' fashion. I do not have indicators for PM flights like these that I
trust because nothing captures the volatility of the PM markets. The technicals now command my
desk instead. I note also that in the futures market, long side interest from large speculators has
shot up to record levels for gold and silver. If you are enamored, check out the wide range of
bug's sites.

Gold
the weekly chart shows an uptrend from late 2015 sold-out low with price now in top of rising
channel. Market supported by positive reversal in 40 wk, m/a, but is clearly overbought on an
intermediate term basis. Premium in price to the 40 wk. m/a is an elevated 14.7% but is nowhere
near an exalted level.  Gold Weekly

Silver
The silver chart is much like the one for gold, except it is more grand in that the RSI overbought
is higher for silver and its premium to the 40 wk m/a is a zippy 30%.  Silver Weekly

SPX -- Weekly

Fundamentals
Forward looking economic indicators continue to suggest the US economy will perform better over
Half 2 '16. Since I prefer the household survey of jobs obtained over the payroll report, I regard
the large - 287K - increase in employment reported today to be of less significance than the fact
that the household survey shows only nominal progress in employment since this spring, with this
latter measure more accurately reflective of the slow progress of the economy this year. Better
sales and production data are needed to firm up the case that the economy is again moving forward
at a better pace. Moreover, with the unemployment rate already under 5%, what is needed now is
better productivity growth rather than strong jobs growth and this requires more nearly full staffs
to expeditiously handle a larger order flow both in manufacturing and commercially.

Technical
A post Brexit rally has brought the SPX to a slight new closing high. The move to a new high
confirms a continuation of the rally began in Feb., albeit one which is now on a considerably more
restrained trajectory. Note especially the bounce in the MACD off its following 'red line' in the
chart just ahead. SPX Weekly  In short, the SPX dodged a bullet (Brexit).

The SPX and the indicators on the chart show a positive reversal around Feb. of this year and
continuation of an intermediate term uptrend. The market is nearly 5% above the 40wk. m/a
but is not seriously overbought on the weekly indicator readings. My suspicion is that should
this advance continue, it will prove volatile as the market is trading well above the trend line
set by the Feb. / Jun. lows. This baby is building in some roller coaster potential.

Economy, SPX, Long Treasury

US Economy Comment
By the indicators, the US economy steadily lost growth momentum potential from mid-2014 right
into 2016. My weekly leading economic indicators have been rising since Feb. of this year, and
now monthly leading and coincident measures are rising. As well, my future inflation pressure
gauges have been advancing since Feb. after a number of months of decline. The US industrial
base fell to low, near recession levels going into 2016 but appears to be firming modestly. The
weakening economy from mid-2014, aided and abetted by a bust in the oil price, has lead to
a significant decline in profitability and earnings, too. Lead indicators suggest profits may soon
start to do better. The Fed badly misjudged the negative impact the cessation of QE would have
on economic activity and compounded the error by raising short rates in late 2015. With ongoing
decent private sector liquidity growth, the economy may finally be righting itself after a fallow
period. Indications of stronger growth could turn out to be a flash in the pan, but if not, then
the real economy and recovering pricing power will put downward pressure on the excess liquidity
which has sustained the capital markets for many months.

Stocks and Bonds
Since late 2014, as profits  prospects and inflation pressures waned, the smart bet was to prefer the
long Treasury over the SP 500. $USB vs. SPY High quality bond prices have firmed as the economy
slowed, inflation pressures abated, and the Fed was forced to put a cap on further tightening. Even
though forward economic and inflation measures have strengthened since earlier in the year, players
have been interested in giving the edge to bonds on a trend basis despite the volatility. So much so,
that even the 30 yr. Treasury at a 2.15% yield is trading inside the yield on the SP 500.

Viewed longer term, both the S&P and the long Treasury price are overvalued. However, if the
economy is indeed regaining some sustainable traction, stock players will fret over future
monetary policy, but long Treasury buyers may even have more to worry over.

Closing
Ever since the Fed announced it would taper and then close out its huge QE 3 program as 2014
wound up, I have been concerned how well the US economy would fare without the very large
large tailwind. Here we are 18 months later, and the best I can do is cross my fingers that the
economy can progress decently with private sector funding support. If it can, the ballgame will
change markedly in various markets.

SPX Daily -- Setting The Stage Anew

The argument here for several years has been that when the Fed has turned off the spigots
following several years of massive inflation of its balance sheet and the monetary base, the
results are not happy for the economy and the stock market. There have been only a few
instances of this kind of activity, and based on over 100 years of history, the economy and the
market have not done badly so far, as private sector funding has been sufficient to keep a slow
recovery going as well as bids under the stock and bond markets. But, when the Fed does not
have our back with liquidity flow as now, it can be difficult for the stock market to advance
strongly and volatility can rise substantially. Note how the market has behaved since the end of
the QE programs in late 2014. SPX Daily

1. The Brexit sell - off has blown the 2016 rally out of the saddle and taken the market below
 short term support as well as the 200 day m/a.

2. The market is a significant 4% below its 25 day m/a, and is showing as oversold on the short
term RSI measure. That is enough damage to get at least a few traders interested in nibbling
long as might the very high volume.

3. The SPX is not yet close to hitting the kind of deep oversold that I think is most interesting in
a market without Fed liquidity backing and in a more volatile setting. Check out the MACD and
the momentum panels in the lower portion of the chart. This strategy would not suit many but I
have done well with it.

Gold -- Trading Up On Safe Haven Merits Now

Most of the favorable price action in gold for 2016 reflects a rather mild improvement in cyclical
fundamentals. For the short term, the fundamentals have faded slightly and now gold is advancing
on the Brexit news, with traders anticipating Brexit will trigger heightened uncertainty over the
global economic outlook and tack - on geopolitical instability in the EU with the perceived
possibility that other members, angered by the large influx of migrants to Europe, may look to
exit the union to gain greater sovereignty and get away from the gnomes in Brussels. Could be.
After all, years of weak local economies in the Eurozone, abetted by local austerity programs,
all coming in the wake of Europe's serious recession and God awful slow recovery, have had
withering effects on the political order in any number of localities. Hell, if a well established
democracy like the UK can have political upheavel, what can be said of the lesser lights?

The died-in-the-wool gold bugs are on the long side of the trade, but so are a bevy of momentum
traders and short term hedgers and this suggests that most of the players will need a steady diet
of bad news about economic and financial stability to re-inforce the long side order flow. I would
argue that with the world already six years into a slow and uneven economic recovery that the
odds favor negative surprises. But, without strong cyclical pro - inflation impulses in place, liking
gold as a safe haven only is a risky proposition. I would prefer to see a return of rising commodities
prices, a weaker US dollar and signs of faster global economic output growth in support of gold
than speculation about the effects of possible heightened political disorder. The latter is just too
tough to get a handle on to set strategy.

The weekly gold chart shows the metal is still in advance mode, has broken important resistance
at $1300 oz., has the support of a rising 40 wk. m/a and is again flirting with overbought territory.
Gold Weekly

SPX -- Weekly

Another rally above SPX 2100 was cut nastily short this week as the Brits voted by a modest
margin to exit the EU. Plainly, as the vote approached, players were zigging, blissfully unaware
that British voters were set to zag. In my view, the EU has been enough of a flop over the past
ten years that the Brits were warranted in no longer wanting to remain. But the timing of the
exit was bad as the EU, off its own bat, had not yet done enough damage to the UK to draw a
sizable majority of seething voters. The comparatively thin margin of 52 -48 plus the obvious
demographic divide of old vs. young captured in the vote is going to leave acidic recrimination
and contempt in its wake and it will put enormous pressure on England's righty old farts to show
clearly how Brexit will be a major blessing in disguise for the young. PM Cameron gets the 2016
Talleyrand Award, for he made not just a mistake, but a blunder instead.

It could easily take a few more days for both traders and investors to ransack the news to assess
whether the further unwinding of pro - remain bets will set off additional destabilization in the
markets and to come up with working assumptions about the after - effects of the vote for the
global economy and the markets in the months ahead.

It is worth noting that Friday's rout of the SPX stopped around 2016 support in the 2040 area.
SPX Weekly

The top panel of the chart shows the VIX or volatility index. A sharp rise in this measure often
reflects both instability and fear in the markets and a boost in the VIX above the 20 level
signals enough trader apprehension to warrant concern of more market price downside ahead.

Note also the MACD indicator. It is on the verge of the first negative "cross" since the rally
began in Feb.

The SPX has made powerful progress since its 666 low in Mar. 2009. It commands a p/e ratio
above 20x. It doesn't owe us anything. Gains from this level are gifts from the Gods and not
to be squandered.

You should show up on Monday to see if the bloodletting is complete.

Long Treasury -- Steaming Toward Overbought

US financial liquidity has been growing faster than the sluggish economy. Short rates remain at
nominal levels and the CPI has averaged less than 1.0% for months. So, bond market players,
both large and small, have been pushing the bond price ever higher with speculative interest
running very strong. The market is unsettled this week as traders await the Brexit vote on the
23rd. The bond price remains in a clear uptrend from the end of the Fed's QE program, although
momentum has moderated.  TLT

The TLT bond equivalent has recently broken out to new high ground, and a substantial inter -
mediate term overbought is developing. By long run parameters the Treasury market is vastly
overvalued, and further price progress hinges on a continued slow global economy with player
concerns occasionally heightened by real and contingent crises which could roil the world's
markets. Long Treasury investors are offered 2.5% currently to cover longer term interest rate
and inflation risk as well as future supply and currency risk. It would be presumptuous to say
that a top is right at hand, but history will eventually show that the market has entered a major
topping zone.

SPX -- Daily

Last week, I was guilty of damning the market with rather faint praise. Since, the SPX has rolled
over and has once again fallen through difficult resistance at 2100. The strong momentum of the
winter rally died out in mid - Apr. and a second but weaker wave up carried the SPX up into
early Jun. near 2120 before the trend connecting it with the Feb. low broke. The market has dipped
into slightly oversold territory and near term support for the SPX stands at 2040.  SPX Daily

No one thought the Fed would raise the FFR% at today's FOMC meeting, and with the economy
appearing to do better in this quarter and some modest improvement in business pricing power too,
fundamentals were not bearish, although the SPX remains indeed expensive.

More attention is being paid to the BREXIT issue. With no raft of economic positives to attend
an exit from the EU, and given some socio - political inertia, I would have thought the Brits
would opt to stay in, but the 'leave' crowd has apparently picked up some steam in surveys,
thereby tilting equities market players toward perceived safer havens.

As well, the oil price, which should be in a sharp seasonal downtrend in Jun. has started to waver
some, which in turn dampens the outlook for energy shares, a development bullish stock traders
now aver. For what it is worth, oil has actually held up pretty well so far.

Since my shorting days are over now that I progress further into my dotage, I have no interest
in taking a flyer on the stock market unless  a much deeper oversold condition comes along. It
has been my view that this is the way to own equities in this environment.

SPX -- Daily Chart

the consensus continues to build that the Fed will defer raising short rates for a while longer as
the US economy remains sluggish. Thus, the US dollar has been weak in Jun. so far and this has
worked to push the oil price and the commodities market higher. The continued strength in the
oil price leaves the market in a clear counter - seasonal advance. Presumption of a less restrictive
monetary policy by traders coupled with the still ongoing rally in oil are working to  push the
SPX higher and leaves it above the prior strong resistance line at 2100 and closing in on the
previous record high set last year in May.  SPX Daily

The SPX is expensive, is extended on a long term basis, and is backed by shorter run speculation
about monetary policy for the months just ahead. The rally off the Feb. 16 low is being extended
and the market is not yet flashing material overbought. Since sentiment has tended toward
bearish all year, players are hardly ecstatic. Still, you are on your own here, and if you're long,
review your risk tolerance.

One sneaky political point needs to be made as well. With the Obama administration in control
of much of the economic data flow here in this election year, the 'natural' tendency will be to
save the stronger readings until later in 2016 wherever there is discretionary leeway. Thus, if you
like the lower US dollar, it may have your back for a while longer.

SPX -- Weekly

Fundamentals
The weekly leading economic indicators have been suggesting a decent rebound in output this
spring, but the degree of positive response in the broad economy has been only slight so far.
Inventories are coming under control, but remain high. As well, the household survey of civilian
employment has flattened out in recent months despite an improvement in total business new order flow.
Plainly, as 2015 wore on, business geared up for stronger economic performance, and progress
has been very slow instead. Consumers have been lacking in inspiration and more company owners
and managers are uncomfortable in a sluggish global environment. Productivity has suffered as
companies are geared now for higher levels of business. The US plainly needs to pick up the pace
soon before a more lingering malaise develops.

Valuation
SPX return on equity at market (earnings yield) is running around 4.7% and the dividend yield is
about 2.2%. Thus, the SPX remains at a premium to cash equivalent and the 10 yr. Treasury, but
this is thin gruel especially since operating earnings remain under pressure and the p/e ratio on
last 12 months net per share is 21x. Investor patience, remarkably, has not yet worn that thin.

Technical
The market remains in an uptrend but has dropped into consolidation mode following the terrific
Feb. Apr. upside run. Short term support has now risen to SPX 2040. The market still correlates
well with the direction of the oil price this year, although now less so than earlier. Equities players
need to pay heed to the fact that June is a period of seasonal weakness for the price of oil (See
the WTI crude chart in bottom panel).

Once again, the SPX sits at the 2100 resistance level.  SPX Weekly

The Greatest....

I met Muhammad Ali in Chicago in the latter 1960s. He had already been stripped of his title,
and strongly rebuffed by whites for his objections to fighting in the Vietnam War, was camped
out in Hyde Park near both the University of Chicago and not far from the mosque led by Elijah
Muhammad, the dean of Islam in the US. I was a Phd candidate at U. of C and I was standing
on Kenwood Ave. with a colleague of mine. As he approached on the sidewalk, my friend, who
would go on to be president of a major west coast seminary and divinity school and was a gifted
orator even then, opened his arms and said in a crisp voice, "Hey champ...You know as far as
we're concerned you're still champ." We got the brilliant smile, saw the shoulders relax, and a
warm nod and hello. He was truly a larger than life guy. Tall, broad shouldered as you would
expect, handsome with flashing eyes. It was very tough for him then, but he gave us about twenty
minutes, ever gracious. We talked not about boxing but about the war and the great damage it
would do.

He liked the idea that just two white guys on the street knew his predicament in detail and welcomed
him anyway. We had notepads with us but never asked for an autograph. We shook hands and off
he went. These were good moments in what was to become a very difficult time for the US. And
through it all, Ali kept his dignity and eventually won back his championship and so much more.

Stock Market -- Long Term Issues #1

It can be mighty important to gain roughly correct perspective on the long term potential for the
stock market. Looking back over the past nearly half century, I have been prescient at times and
other times I have been well off base. I have had the good fortune when I have been in the wrong
to correct the view before the errors became fatal. I do not think I have a strongly held view of
the future this time out. There are only issues instead. If you are the indulgent type, read along and
see how the series of several posts on the long term outlook planned for the next few weeks strike
you.

I am not uncomfortable with the idea that 2009 marked a generational low for the stock market.
Stocks have been bought for growth primarily since the end of WW 2. The chart coming up shows
the SP 500 since 1950. ^GSPC  (Chart is in log form. Some of you may have click off "linear.")

The tops on the chart form a nice trend line until the 1990s when a quantum rise in the p/e ratio
took the SP 500 into large bubble mode for the first time since the 'roaring twenties.' If the trend
line from the tops in the 1950s and 60s is extended all the way to the present day, you will observe
a 'bubble echo' for the 2003 - 07 period which was followed by a deeper bust in 2008 - 09. That
bear market was the worst in many years and, lo and behold, the subsequent bull run has brought
the market again above the top of the trend line from the 1950s.

Thus, on a long run basis, the market is again hyper - extended, although less so than in 2007, and
very much less so than in 2000. The long term history of the stock market going back 200 hundred
years shows that buying hyper - extended markets, even dinky ones, is not a rewarding strategy.

The first longer term outlook issue then is that we have a very expensive market to cope with.
Secondly, there has been a significant trend break in the bull market running off the 2009 base.
SPX

There has been near term support at SPX 1800 and the rally this year has been strong enough to
reverse a downtrend and leave the market in limbo. Last year's rollover in the MACD measure
(second panel) also not a good omen at least in view of recent history.

In the next post in this series, figure we'll put some fundamental meat on the bones of the charts.
Interesting here as lead in is that the SPX has come off a lengthy period of net per share growth
that has been well above the long term average.
 




 

SPX -- Weekly

Fundamentals
A low risk / high return profile for the stock market comes along when the Fed fosters strong
liquidity growth and suppresses short term interest rates. Such was the case from early 2009 through
year's end 2014. Last year marked a transition period when liquidity growth slackened as the Fed
kept Fed Bank Credit and the Monetary Base flat and the Fed ended the year by raising short term
interest rates. These developments send fundamental stock market risk substantially higher and
diminish the potential for high returns. The stock market can still rise during such periods, but now
players must realistically address their individual risk tolerance as the economic expansion grows
more mature.

The best guess now is that business sales and profits are set to reverse downtrends and resume
positive direction. The price earnings ratio of 20x + is nearly fully discounting improving business
sales volume growth and modest but strengthening pricing power. So, to get fairly strong positive
lift from the current SPX 2100 level over the next year or so is  going to require good fortune on
the earnings front and some speculative zeal from market players.

Technical
The SPX chart is positive based on the indicators but is about to become more pricy. SPX Weekly

Gold Price

As outlined in an Apr.13 post on the gold price, gold fundamentals have, on balance, turned mildly
positive. There was a nice long gold trade late in 2015 as fundamentals transitioned to positive, but
the price soon became strongly overbought, and it was reasonable to question whether gold had
come up too far too fast given the very mild improvement in the underlying fundamentals. It was
also mentioned that should the gold price break above $1,300 oz., we might have a very interesting
situation. $ Gold Daily

The chart shows the evolving powerful short term overbought position on gold and the negative
price reaction at important overhead resistance at $1,300 just as the USD (bottom panel) went
into rally mode, all at the beginning of May. Dollar players have been wagering that the dollar
will continue to strengthen should the Fed elect to raise the level of short term rates at the Jun.
FOMC meeting, if not maybe at the following one. I like the USD longer term, but its fundamentals
have not improved enough to support  a value above the high 80's in my view. That is a minority
position these days, but with the gold price  now approaching an oversold situation, gold is
on the radar screen for the next few weeks to see if it can rally off the oversold.

Oil Price

Oil supply and demand have come into reasonable balance in 2016. Unlike prior periods when
there has been an oil price bust, spare capacity at the well head is rather small, although the
Sunni Arab states are working to boost production. The production surge of 2015 has produced
an outsized global crude inventory position, but continued global economic expansion will work
slowly to reduce the overstock.

There has been a vigorous debate for months by oil price observers about the proper direction
the price should take, but given that the glut is largely now related to inventory rather than
production vs. demand, I have based my trading strategy primarily on the seasonal price pattern
for oil. Better lucky than smart is the trader adage that applies in this case.

Oil continues in a strong seasonal uptrend underway since Feb. The 50 day m/a is nicely positive
and has moved above the 200 day m/a and the oil price has been exceeding both. Oil is now
moderately overbought against its 200 day m/a, a situation not observed for quite some time. The
price is also short term overbought on MACD and RSI, although these triggers have yet to work
because of the strength of the positive trend. WTIC Daily

The oil price is now vulnerable on a seasonal basis until the latter part of July when another
period of seasonal strength would be set to begin. Springtime price vulnerability is usually not
that severe, and some players will simply hold on through this interval if basic fundamentals
continue through.

SPX -- Daily

The overbought readings for the SPX in both Mar. and Apr. have begun to yield some
 selling pressure. SPX Daily

This seems to be a normal development following such a strong run up in the index from the
Feb. low. The issue now is how deep the sell off will run. The chart shows short term support
around SPX 2040. A breech of that level would suggest some more pain may be on the way.
It is also worth noting that a still rising oil price is not now supporting the uptrend of the SPX
(WTIC is in bottom panel of the chart).

It is entirely possible that players may be growing apprehensive here in the face of stronger
economic and inflation data coupled with Fedspeak calling a short rate increase for June a
'live option'. Straight off, the fundamental case for hiking the FFR% in June is simply not there,
so should the FOMC elect to boost rates again, it would be about as unwarranted as was the
Dec. 15 hike. Speaking editorially, such Fedspeak, particularly from non-voting members of
the Board, only adds to market uncertainty and volatility.

If the economy can maintain a faster pace of expansion, profits will begin to recover nicely
and another 25 or 50 basis points up in short rates should not change valuation parameters
materially. I am hoping for this and do not see a compelling reason to get into a tizzy about
share prices. But since market sentiment has been growing more bearish for quite some
time, I could wind up eating those words. (Scroll for May 8 post on sentiment.)

30 Year Treasury Yield -- Early Warning Signs

Fundamentals that suggest the direction of long bond yields are falling into place to support higher
rates (and weaker bond prices). Cyclical factors turned weak in the latter portion of 2014 and
signaled the onset of a declining trend in the $TYX.

This year there have been upturns in the manufacturing PMI and in industrial commodities prices.
The recovery in the PMI has been modest with the exception of % of companies with a rising new
orders book, which has been strong.Weekly data on physical output is experiencing a mild positive
reversal and future inflation pressure gauges have been turning up after nearly 18 months of decline.

It is important to note however, that the mild upturns in cycle pressure are coming off a very
cyclically depressed base. My Cyclical Business Strength Index, which is a broad measure of the
components of production with heavy emphasis on plant utilization, reads a low 128. In the past,
when the economy was running flat out at effective capacity, the index could register up to 145
or over 13% above current levels. History also indicates that it was often only when the index
reached upwards of 135, that the Fed would turn aggressive in tightening monetary policy. So,
the current upturn is still well 'under the radar' when it comes to measuring cyclical pressure.

Bond traders operate on such a 'hair trigger' when it comes to dumping long maturities when
cycle pressures are on the rise, that it is interesting that the recent rally in bond prices has
continued even though pressures are inching ahead. Trader reluctance to reverse course may
well reflect a consensus conviction that faster output growth is not sustainable and that it is
not worth getting whipsawed in the process. Could be, but stronger data will likely dispel
consensus convictions in a hurry.

Stock Market Sentiment

I prefer real money down measures to study sentiment and my favorite is the all-equities put / call
ratio. A very low P / C ratio indicates the market is overly bullish and a high P/C implies players
are too bearish. A good measure to capture this portrait of sentiment is a 13 wk. m/a of the CPCE

The powerful advance in the SPX from late 2011 through mid - 2015 saw a sharp downtrend in
the CPCE that carried to very low levels by late 2014 and signaled traders were too bullish on an
intermediate term basis. The low in the 13 wk. P / C ratio coincided with the end of the gigantic
QE program by the Fed. Since then, sentiment has gradually turned less positive as the P / C ratio
trend worked persistently higher into the early autumn of last year following the first sharp sell-off
of a market correction that carried into Feb of this year. With the subsequent rally, bearishness
has eased somewhat but still remains fairly high. Note too, that the bearish trend of sentiment has
yet to reverse course but remains hanging in the balance.

The takeaway here is that from a contrarian perspective, the market has more upside to it down the
road, but that in the absence of a reversal of the P / C trend, players need to acknowledge the
potential for another sell-off  before the corrective process of the market may be fully behind us.

The bottom panel of the chart shows the NYSE TRIN indicator. This is a measure of buying vs.
selling pressure, with a high TRIN signaling selling pressre and a low TRIN indicating net buying
pressure. The heavy selling pressure in evidence since the first significant corrective hit to the
market over Half '2 '15 has tapered off substantially since then, with direction of pressure now
neutral over the past couple of months.

Presidential Politics & The Markets

The US will have a newly minted President come this Jan. The first day of full time work for any new
President involves getting together with top staff and advisors to begin development of a re-election
strategy. In getting the plan together, the key sin to be avoided is to have the economy in trouble
during the last 15 - 18 months of the first term. You want the economy humming along as best it
can during the protracted lead-in to the next election. So this means taking stock of the economy
after the inaugural festivities and delving into whether it  can be kept relatively comfortably
afloat throughout the forthcoming four years or whether there are excesses in the system best dealt
with earlier during the President's tenure. Since the markets will be aware of these excesses and how
troublesome they may become, the early going of the first term will feature strong investor focus
on official Washington.

On the assumption the US economy will drift along positively into early 2017, it will likely be the
case that the new administration will confront stronger but still mild inflation and relatively full
employment, at least on the surface. Many in the workforce now hold more than one job and as
official part timers have few benefits. Early 2017 is likely to see that there is still significant
facilities over-capacity and plenty of liquidity in the banking system. So, unlike in many post
election years, the argument to allow the economy to run out the string with the aid of perhaps
additional fiscal stimulus in the expectation that excesses can be more fully redressed after the
next election will prove far more tempting than normally. If this preliminary assessment proves
correct, it may not make that much of a difference who wins the 2016 election, at least in the very
early going.

As investors and traders we can get caught up in the election battle in the months ahead however
we may, as long as we keep in mind how quickly the re-election campaign begins.

looking at the 2016 landscape, we find a four way political spectrum situation for the first time
really since the 1912 election. As with Eugene Debbs then, we have a newly emergent left wing
in Bernie Sanders. There is a left-of-center contingent behind Hillary Clinton. Then we have the
hardcore GOP, now captained by House Speaker Paul Ryan and a new, less plutocratic GOP
running with The Donald. To make this case, Trump will need to tell Ryan to stuff it and not
give in to the Ryan ultimatum. That little twist is ahead along with perhaps several others as
we move on to the big day.

SPX -- Daily

It has been obvious for a couple of weeks that the SPX was overbought in the short run, and now
we are again seeing some price weakness. Traders of course have taken note that the market did
fail to take out resistance again at 2100 just the other day. SPX Daily.

It is hard to quarrel with the idea the market is due a rest or even a minor pullback after such a
feverish run since Feb. Moreover, the SPX remains rather expensive based on current earning
power which continues to trundle along at around $100..With inflation and short term interest
rates at nominal levels, I will be raising my fair value target range for the SPX in Jun. to 1990-
2160 from the current range of 1870-1990. This implies that through 2017, business sales and
profits need to advance appreciably with both stronger volume and pricing power to drive higher
results. The leading economic indicators I most rely on have turned higher in the short run, and
I am reluctant to turn bearish as long as future fundamental trends are nicely positive. So, if a
big selloff is in the cards for the next couple of months, I am likely to miss it. Importantly, if
the advance indicators start to flatten or weaken at some point later in the year, basic reassment
would be in order, because the question would naturally arise whether longer term earnings
growth potential is too liberal for the times we are in. Since such a judgment might have major
negative for how stocks should viewed, I am not anxious to pre-judge the issue.

You might take note that with a weaker US dollar, some equity money might shift to play the
oil, PM and commodities markets more directly as they have positive momentum currently.
Noteworthy also is whether the oil market can retain some positive direction over the next
few months, as a period of seasonal consolidation is in order.