Gold (GLD) -- Weekly

The pace of global economic recovery since the Great Recession ended in 2009 has been slow, with
cyclical inflation low. There was a speedy interval from mid - 2009 and running into 2011, which
was when gold, freakishly, entered a price bubble. The subsequent blowout came to rest at the end
2015, when the gold price had fallen down a little below the all in cost of producing an ounce of
the stuff.  GLD Weekly

The economy started to regain some growth momentum in 2016  as did inflation and the gold
price, although highly volatile, has trended higher off its post bubble low. Bottom line, gold has
advanced at a muted pace since the low as it should given dollar stability and a still modest set
of economic expansion and inflation data. From a technical perspective, gold is in rather neutral
territory in terms of oversold / overbought and its premium or discount to its 40 wk m/a. In fact,
the metal is about to tackle its flat 40 wk average presently. Failure to break above the "40" would
be a negative.

Speculation about a Trump pro - business policy in favor of faster growth (and more inflation)
has eased greatly in recent weeks as markets players reassess the programs' outlines in terms of
whether they are doable from a political perspective. There is more intensive questioning about this
issue, but the towel has yet to flutter over the ropes by any means. The USD rallied nicely after
the election, but has drifted lower recently, and is in the process of testing its 40 wk m/a, but
to the downside. If sentiment in the markets again begins to favor the Trump stimulus plans,
the dollar could rally and this might put some short term downward pressure on gold as players
buy stocks instead. If sentiment about Trump's ability to get his way weakens further, the dollar
could come down more and gold would likely be favored. $USD Weekly

The economy could well slow down some time later this year as could inflation pressure.
Everything equal, that could lead to a trading range for gold. If the Trump plan passes muster,
that will help gold down the road as would a nasty turn in US - China trade policy which may
also hit the Trump docket.

SPX -- Weekly

Fundamentals
My weekly cyclical fundamental indicators have been on the flat side since the end of Jan. Since
they are forward looking, there is a suggestion that the Apr. - Aug. period of this year could see a
slowdown in the progress of business sales and profits momentum. The SPX has tracked the
indicator well since Jan. 2016, so a flat market could continue for a while. On the plus side, there
are some preliminary indications the recent thrust upward of  the y/y CPI may dampen before
long and perhaps take some of the pressure off the Fed to hike rates quickly.

Trump / GOP Opera Buffa
The American Health Care Plan blunder revealed advanced buffoonery in both the White House
and in the Congress. This first disastrous try at serious policy making should, in my view, knock
200 points off the SPX forthwith. But, for all I know, The Street may well try to put a more
positive spin on this serio - comedy to keep up interest in the pro - business tax and infrastructure
programs still on the docket. The alleged dalliance of Team Trump with Russians to undermine
the recent election and, perhaps, to reset  US foreign policy to a more kindly stance toward
Mother Russia is now a brisk double dumpster fire that still requires attention.

Technicals
The SPX is in the midst of working off an intermediate term overbought condition. The post -
election rally has been very resilient, but with some slowing of profits growth out ahead and
the recent AHCA fiasco set to prompt at least a little shiver, you might keep in mind that
longer view trend support is at SPX 2200 - 2250.  SPX Weekly

Oil Price

Back on Feb. 5, I posted that the oil price was subject to a hit to the downside. The 52 wk
price momentum had assumed parabolic proportions in relatively short order and speculative
long positions in the futures market had reached record levels. Too much was riding on a
continuation of a sharp rise in the price.  Oil Price

Price momentum has come way down and the grandly elevated speculative long position has
been partly unwound. the uptrend in the oil price since early 2016 has been broken. The price
is now veering toward an intermediate term oversold but has room to head lower before it
reaches that level. Oil has remained in the $40 - 60 bbl. consensus range and there is near term
support down at roughly $44.

Oil demand has firmed as expected, but production has been larger than earlier consensus had
it as others ex the OPEC core production cutters boosted output, including the US. So, the
market is not yet in balance on supply / demand and oversized inventories of crude have moved
higher. The financial damage to the industry from the 2014 - early 2016 price bust was not
sufficient to wipe out much marginal production, and the Saudis will have to keep that in mind
in deciding whether to hold back OPEC output beyond the Jun. 30 termination of the current
production cutting deal. It might be wise to wait and extend the deal to see if rising demand
picks up what is now a small surplus in daily output before going 'nuclear' again.

With a strong bullish case now more elusive in the near term, I would not mind seeing the
still large speculative long position in the futures market unwound further before showing
further interest.

SPX -- Weekly

This cyclical bull is currently still trading at a major 3 - 6 month (intermediate term) overbought.
The SPX is near its recent all time high, but positive momentum has stalled in recent weeks and
the uptrend line off the post-election rally has been violated. But, there is not enough evidence to
argue that the rally has ended yet. On the fundamental side, my forward looking cyclical weekly
indicators have also flattened out. With the Fed in tightening mode, market players are watching
weekly and monthly indicators carefully. Monthly business sales have lifted nicely and profits
data is improving but other core measures of economic health such as industrial production, the
real wage and 12 month civilian employment growth are far less imposing. By the same token,
the slow pace of broad economic growth still leaves expansion potential ahead. My business
strength index stands at a mild 133 with economic overheat set well above at 140. Overall, there
is 'room' for another pronounced slowdown in the weekly cyclical data set which could trouble
the market, but there is enough slack to warrant the suggestion that any sharp slowing in the flow
of short term data may be followed out in time by yet another cyclical upswing. SPX  Weekly

With the growth fluctuations in a lengthy but slow economic expansion still leaving slack to
be taken up eventually, and, with the Trump stimulus programs still to be fought over, it is not
hard to understand the now popular idea to stick with a high equities allocation and not bother
with market timing. I am too much of a trader to be comfortable with such reasoning.

 

Economic Growth Momentum, Stocks & Bonds

Since the US economic recovery began in 2009, there have been three intervals when weekly and
monthly economic momentum data have surged: early 2009 - early 2011, early 2013 - late 2014,
and mid 2016 to the present. During much of the 'surge' periods, stocks have performed very well
and the Long Treasuries has been trashed. Noteworthy now is that weekly and monthly momentum
data have been running strong for an extended period and may be set to slow down over the Apr. -
Aug. 2017 period. Looking at recent markets performance, there has been a dramatic 'rotation' out
of the long bond and into stocks. SPY:$USB

With the Fed moving very slow to lift still nominal short rates and with some inflation harbingers
such as industrial commodities (including crude oil) having lost positive price momentum, the
possibility of a temporary but significant reversal in the relative strength ratio of stocks to bonds
cannot be blithely dispatched.

The long term trends for both economic growth and inflation are in pronounced down sweeps and
until the time comes when we can say with some conviction the economy has moved from being
price stability prone or even, gulp, deflation prone, back on to inflationary turf, bonds should not
be as richly ridiculed as they are currently.

Perhaps the Trump / GOP stimulus plans that remain on the docket will settle the question and
one can bid adieu to bonds for a good while. That is the current mantra in the markets. More
and more folks are now saying stocks are in a new secular bull market and not just a cyclical advance.

Keep a couple of things in mind. Through most of the economic recovery / expansion stocks
and bonds have been exceptionally sensitive to shorter run changes to economic momentum,
and also note that even though the GOP controls both ends of Pennsylvania Ave., progress
on the agenda has been halting at best.

Stock Market Profile

Cyclical bull market... Buttressed by a year of improving business fundamentals, low interest rates, still modest inflation...However, the market is heavily overbought for the 3-6 month term and is hyper extended especially for the long run...It is expensive on valuation and is facing an increasing headwind from decelerating liquidity growth.

The pace of the advance in such key weekly data as sensitive materials prices and the rate of
decline in initial unemployment insurance claims have been impressive over the past year.
The same may be said for the PMI new order data. Some slowing  in the progress of these
weekly / monthly indicators may be expected over the next few months, and this probably
will not escape investor notice.

Industrial production has been quiescent over the past year but appears set to accelerate in
response to strong new order numbers. Stronger IP will power up business profits but will add
to inflation and could well lead the Fed to take more aggressive action with short term rates. Such
developments could put upward pressure on bond yields and will lead some market players to
reassess their comfort level with the markets p/e ratio.

The market is now trading about 20x estimated 12 month earnings through Q1 '17. That is on the
high side of history and may not sit well as rising production adds cyclical pressure.

The Fed has been curbing the growth of its balance sheet and much stronger total business sales
is eating into the excess liquidity provided by the private sector. The liquidity picture is not yet
a negative for stocks but is darkening. Here too, rising production may play a role.

I am posting the weekly chart of the SPX early because it best reveals the heavily overbought
environment we are passing through. Overbought markets surely can get even more so, but we
are well along here and a loss of the strong momentum of recent months may not sit well.
Weekly SPX

SPX -- Daily

Buy side trading discipline has been cast to the wind and indicators warning of a substantial
short term overbought condition in the market have been waived off. Market timing is out
and chasing them up is in. There is as yet no economic growth  visibility past mid - year, 2017
and all the Trump / GOP Congress programs are being nudged further into the future and
worse, are laced with fallacious "single entry bookkeeping" by the Street and various analysts.
there is a lot of heavy political and logical thought lifting to be done in the months ahead.
SPX Daily

A Surprising Change...

Now in my late 70s, I never thought this would happen. I have become lazy. Henceforth, I
will post only occasionally. You know, for several years now, I have been much more interested
in how the US economy would come out of the global depression than how the markets would
do. We are not out of the woods yet, but the US has made substantial progress in stabilizing
the economy. Unfortunately, the socio-political side of the ledger is not in very good shape at all.
We are in for a period of White Mischief as the GOP is set to pander to the wealthy and is
eager to take actions that will create an even larger mal-distribution of income and wealth.
So, social stability could be threatened in the years ahead if a tyranny of the minority lead
by Trump and his 'basket of deplorables' fully gets the upper hand.

SPX -- Weekly

Fundamentals
The cyclical bull market remains intact. US business sales have recently accelerated sharply to  4 - 5% y/y and SPX net per share is starting to break out to new high ground. Leading earnings indicators imply rising earnings well into this year, with $130. an ok target, and with analysts now
looking for upwards of $150 in 2018 (assuming a battery of tax reforms are enacted). Inflation
is also on the rise with the CPI registering 2.5% y/y for Jan. '17. The Fed is now behind the curve
and is widely expected to raise short rates again before long. Total financial system liquidity is
adequate to fund the economy, but with business activity now much stronger, there is little excess
liquidity to fund the capital markets. Moreover, the production side of the economy has been
running flat, and if it resumes growing as expected, resources will tighten a little and inflation
pressures could intensify further. The current upswing in business activity is the third one since
the economy began its recovery in 2009 and to sustain it easily in the months ahead without over-
dependence on credit accumulation, both the real wage and jobs growth will need to improve.


Investors have yet to begin marking down the SPX p/e ratio as they should in view of prospective
faster inflation and higher interest rates.

Trump
Market players have so far only factored in the positive promises from The Donald when it comes
to allocation to stocks and equity portfolio strategy. That is starting to change as folks watch him
in action. There has been little effect on the stock market so far and for all I know it may stay
that way. But The Donald can be a wild and crazy guy, so be careful.

Technical
the SPX is now strongly overbought on an intermediate term basis.  SPX Weekly

SPX -- Daily

The SPX is now in short term blow off  mode. It has broken above the well - defined 2016 - 17
price channel and is sharply elevated on the 14 day RSI. In recent sessions, there has been a
breakdown of long side trader discipline with folks simply chasing the market higher. On occasion,
this type of near mindless activity can end very badly in a shorter run context.  SPX Daily

SPX -- Weekly

Fundamentals
My weekly fundamental indicators continue in strong uptrends as they have since Feb.'16 and so
continue to support the now nearly year old rise in the market. Key monthly economic data such
PMI, production and business sales have now also fallen into line. Inflation pressure is on the rise.
It is boosting pricing power but has not yet prompted the Fed to abandon the gradual approach It is
following in setting higher short rates. Liquidity provided by the private sector appears adequate
to fund improving real growth, but the Fed is allowing liquidity to run off its balance sheet, which
is a negative that increases the risk to both the economic expansion and the stock market.


Everyone sets their own parameters, but when the Fed does not have your back, I prefer only to
trade the market and hold long positions only for less than a year. On an historical basis, trend
SPX earnings are not extended, but price is hyper - extended owing to the sharp rise in the p/e
multiple since 2011. That development makes me cautious as well, because throughout history
when hyper - extended bull markets turn down, the declines are invariably strong and fast.


For now, few investors are arguing with an improving economy, rising but not yet threatening
inflation, and a Fed that is moving slowly on raising rates.


Technical
The market rise in place since early last year continues, and, on a weekly basis, is growing more
overbought.  SPX Weekly


It is a moderate overbought and may have room to run higher, but the indicators shown suggest
that a pause in the positive action could come soon. At present, the SPX is running about 5%
above the trend line that has supported it since early 2016. keep in mind however, that a strongly
trending market such as we have currently can overwhelm conventional indicators of overbought /
oversold.

Gold Price

Gold economic fundamentals have been mildly positive since early 2016. As discussed over the
past year, the first rally off the 2016 lows in the $1050 oz. area was spectacular, but ended in fiasco
as speculators lost discipline and chased the metal up to 1375. I resumed posting positively on
gold on 12/7/16, and the market has begun a new trend up from the 1140 area. It broke resistance
at 1200 early this month and has gained steadily. The fundamental outlook for gold -- faster
economic growth, rising inflation, a gradualist Fed and dollar weakness remain in place, but so
does Gold's price volatility. The metal is now overbought in the short term. Gold Price

Oil Price

Well, I have been wondering whether this would happen. The oil price has been trending up for nearly
a year. The current price is just below the post - crash high and the market is not overbought against  its 40 wk. m/a. The strongest seasonal period is just ahead and is set to run through Apr. on demand for the gasoline build for the northern hemisphere peak driving interval. The OPEC / Russia
 production cuts have apparently held and the price did not tank over the seasonally weak
Oct. - Jan. period.  On the flip side, the 52 wk. ROC% is going parabolic. That is suspicious, but is
not necessarily fatal. What is worrisome, however, is that long side speculative interest in the oil
futures market is at a record high, and currently tops levels seen at major oil price highs. All the
money that is programmed to go into the long side of the market may not all be in, but maybe we
are not far off from that level. Oil Price

The oil market's supply / demand picture should gradually improve as 2017 wears on, but with
bullish sentiment so strong at the moment, perhaps their is room for a painful hiccup in the
market before it strengthens further.

Inflation Outlook

The broad money supply (M-2) has grown rapidly enough over the past decade to underwrite an
inflation rate of about 5%. But realistically, inflation is not generated in a vacuum, and with
economic demand running well below the level of economic supply, there have been few times
since the Great Recession bottomed in early 2009 when inflation, measured y/y, has exceeded 2%.
As all know, the long term direction of inflation has been in decline since the extraordinarily high
levels seen in the late 1970s / early 1980s. That longer term trend line now has the CPI at 2% and
on schedule to zero out by around 2020. The rapid industrialization of the developing world over
past 30 years has created a large capability to deliver goods and services more cheaply.

The future inflation pressure gauges I use rest heavily on the momentum of broad measures of
commodity prices and key measures of capacity utilization. These measures have been signaling
higher inflation ahead since early in 2016 and have intensified recently as global production has
started to pick up a little steam. As well, another and longer term measure of economic demand
pressure that I use suggests higher inflation running out into 2018. Looking out into next year,
it is not hard to envision the CPI in a range of 3 - 3.5% at some point, especially if oil supply
and demand come into better balance.

Soon, the economy may have hit levels where history shows that the Fed would begin to raise
short term interest rates in a more nearly serial fashion. The Fed has begun to run behind the curve
but continues to appear to wish to proceed to tighten policy in a very gradual fashion. The
gradualist approach could well change if the new administration and the Congress do embark on
a program of stronger fiscal stimulus.

Viewed in the longer run, I think it is far from clear that the ongoing trend of decelerating inflation
has ended. The next recession, if it occurs in the next several years, could bring a return of
deflation pressure and create the need for even more radical techniques of monetary easing. I
suspect the Fed is somewhat concerned about that risk even if most investors and traders are not.

You can link to an interactive chart on the CPI here > Inflation Rate 100 years

China Stock Market

It has been little more than a year since I last posted on China. Since then, the economy stabilized
and the bubble induced by official commentary to bull the market had collapsed. China did intervene
in the market to let it down as easily it could, and with fiscal stimulus programs and 10%+ money
M-2 growth, the market made a partial recovery and followed along on up with the US SPX. I
did not trade it despite the 1.35 beta on the GXC China index fund  and stayed close to home
instead. Despite the fact that Trump won the election, the China market rallied along with other
major markets, suggesting that market players are not yet concerned with a US - China con-
frontation on trade. The GXC spdr ETX is reasonable at $70 in a partially washed out market,
but given the elevated beta on the stock has well above average price risk if Trump is not
bluffing and battles China on trade policy. GXC

SPX -- Daily

The SPX has been essentially flat since mid - Dec. when the strong post - election rally hit a heavy
duty short term overbought. Since then, the key indicators shown on the chart have been fading
just as they did after momentum peaked in the first two up legs of the recovery that began early
in 2016. SPX Daily

Interestingly, the action over the past year shows that decay in the momentum of the SPX does
not signal trouble ahead until the market breaks its 25 day m/a. Then the market has grown less
stable and eventually results in a sharper dip that tests the 200 day m/a. No one can be sure that
this pattern will be repeated in the weeks ahead, but I have found it interesting because at some
point it would be logical for traders to hesitate and seek confirmation that the economy remains
on a positive track and that the new administration is going to pursue sensible policies. The Trump
guys also have the option of moving fast to secure the stimulative and foreign earnings repatriation
programs they seek or waiting for a time to secure a better economic environment both for the
2018 and 2020 elections.

New Yorkers know that the Donald is an egomaniac who does some positive things and some
very destructive things. Since he has apparently decided to be himself as president, folks who
are learning about him as they go along will need to adjust to all the dumpster fires he creates.
For all I know, there may be a little witness distress building now, although the market action
is not yet evidencing it since the market's progress mirrors that of the pattern of the past year.

Stock Market Summary

It has been a long, rather slow economic expansion cycle. S&P profits started strong, but hit a snag
in late 2014, and net per share is only now likely to trend up to new highs. The big story has been
the dramatic increase in the SPX p/e ratio since the end of 2011. Investors have been confident
enough in the Federal Reserve to backstop real economic growth, however anemic on an historic
basis, to direct their attention to the policy of super low interest rates supported by nominal inflation
to lower the discount rate on future cash flows from stocks and thereby hike the p/e ratio. It has
been a repeat of the 1960s despite the tepid economic and productivity growth.


The end of quantitative easing by the Fed as 2014 wound up launched a negative adjustment
process for the economy and stocks, but as private sector liquidity remained moderately positive
enough to fund ongoing cyclical expansion, the economy and the stock market regained a new lease
on life early last year with enough promise to support a rise in stocks to new highs. SPX Monthly


it is not clear that the economy and profits would support much of any gain in stocks this year,
but investors have been energized by the promises of the new Trump administration to foster
stronger economic growth in the years straight ahead and have revised outlooks to reflect faster
profits growth and the expectation that inflation will be tame enough not to drive the Fed to jack up
interest rates too quickly. For investors, it is not the best of all worlds, but it is good enough.


There is capital slack in output capacity and ample liquidity in the banking system to support
a good two years of faster economic growth, but the labor market has already tightened and it
remains to be seen whether new demands on labor can be satisfied given elevated skill set
requirements, a lack of worker mobility and eventual stronger wage demands.


So far, we do not have blueprints of new fiscal stimulus programs, possible negative Trump
forays into restricting trade and the willingness of the Fed to cut the new crew enough slack
to pull it off. Big questions, yes, but investor confidence has remained unphased.


We also have a stock market that is running about 5% above fair value and one that has to be
sensitive to the tradeoff between growth and inflation given the high dependence of investors
on seeing interest rates that remain modest by historical standards.

Update Of Liquidity Cycle

Back on 12/12/16, I posted an upbeat view of monetary policy and the liquidity cycle.  liquidity
It is appropriate to update this document now. Two series I watch to gauge the amount of primary
system liquidity that are provided by the Fed are Fed Bank Credit (the Fed's balance sheet) and
the monetary base. With the end quantitative easing as 2014 closed out the Fed froze these two
series. I believe this closing of the liquidity spigot played a role in slowing down the US economy
and the stock market over the past two years. The US stayed out of recession mainly because of
the more than adequate growth of private sector funding. However, as part of its efforts to raise
short term interest since late 2015, the Fed has constricted the growth of its balance sheet by nearly
$50 billion and the monetary base by nearly $400 billion. During the Fed's QE programs,  the
banking sector saw its excess reserves skyrocket. The reductions in primary liquidity over the
past year lead to a draw in these reserves.  Excess Reserves


The size of the reductions in primary liquidity are unprecedentedly large and would normally be
considered as catastrophic for the economy and the financial markets because of the withdrawal of
liquidity. The Fed is apparently not troubled as the reserves are way in excess of  what banks are
required to hold. Still the Fed is withdrawing liquidity so it is incumbent on analysts to monitor
this situation going forward for possible system wide effects such as development of an undertow
for the economic expansion. Important as well is that the Fed may not feel constrained to add to
its balance sheet if it sees this step as necessary to keep the expansion intact.

SPX -- Daily

Short run business / economic data have continued to move positively, but the SPX has been
trading basically flat for the past month. The simplest explanation of course is that the strong
post election rally brought the market up to near term overbought levels and that it has been
in consolidation mode since.  SPX Daily


Price momentum has gone from strong up down to neutral levels as the market settles in near
its 25 day m/a. The indicators have turned down, but no break has yet occurred. As discussed back
on Jan. 2 (scroll down), the pattern of the market advance since early 2016, if it follows through,
suggests continued chop to be followed by a sell down to test to the 200 day m/a. This pattern could
take a couple of months to complete and is based partly on my assumption that players are
exercising bullish zeal in relatively short doses and have not been ready to throw caution to the
wind. The SPX is trading now about 5.6% above the 200 day m/a. In zippier times, when the guys
have been very enthused, the market has ridden up to in excess of 10% of the "200".


The large shifts in political power in the US in the wake of the election point initially toward a
more business friendly environment. I think the new crew is a good thirty years late in terms
of relevance, but most others see it differently. But more importantly for the year upon us, the
market has already blessed us with a good eight year run, economic slack has been cut during
the expansion, and the Fed is now tightening, albeit gradually. It may be tougher to do well
chasing stocks up now then it was when the Fed had our back as They did most of the time since
2009.

Market Psychology & SPX Weekly

Market Psychology
Following the strong post-election rally, the market has lapsed into a 2260 - 2280 range on the SPX
since mid-Dec. Toward the end of last week, Bloomberg featured quips from US dollar traders that
suggested: "Where is my stimulus?" or emerging impatience as the lead-in to inauguration day
wears on. So far, The Donald has offered growth negatives such as the idea that drug prices be
subject to haggling and the hit on Lockheed for padded costs. Meanwhile, the Congress is fast
tracking repeal of the ACA -- a negative for health care business volumes. There is a contretemps
with China over the status of Taiwan and a crackling good dumpster fire involving Russia's hack
of the DNC and subsequent developments. Get used to it. The stimulus programs will be announced
in due time, but we're talking Trump here and you have to take the goodies along with all the other
horseshit and troubles that will inevitably come. So, markets players patience is being tested and
all will have to wade through the Trump crap. And then there is the Fed who may have to face
programs that ultimately raise inflation potential.

SPX Weekly
The SPX continues its bull run from 3/2009. It is now nearing a moderate overbought against its
13 and 40 wk. moving averages, and is moving into overbought territory on RSI and MACD. There
is room to run on the upside, but such will involve investors relaxing more of the caution they have
displayed since the end of 2014 when the Fed ended the QE programs. Near term business
fundamentals will continue to weigh heavily on the action and players who are counting styrongly on
a new pro-business environment to produce more positive market action will have to keep spirits
up.   SPX Weekly

Gold Price

The argument here back on 12/7 was that the economic fundamentals continued positive and
that the blow out in the  market over Half 2 '16 left the metal sharply oversold. I also did some
complaining about how difficult it has become to trade gold because the futures market has been
grandly inflated by large pools of hot money over the past 15 years. Well, the market has rallied
here in the early going this year and the deep oversold is being remedied reflecting a weaker
dollar and a flat stock market since mid-Dec. Inflation fundamentals have also picked up on the
basis of stronger US and China economic activity. The US dollar weakness has probably done
the most to carry the day.

The gold price is approaching its 50 day m/a and is also approaching the $1200 level. That $1200
price has served as a resistance point in recent years and when it is pierced with conviction, can
extend a rally.  Gold Price

I have a macro argument that the fundamentals for the USD will strengthen further over the long
term. It is a view I have held since the early aftermath of the deep recession of 2008-09, but it
calls for very gradual improvement in the dollar's standing. At this point, I regard fair value for the
dollar to be around 90 - 92, but it has been running ahead of schedule since the Fed first tightened
policy in 2014 by ending QE programs. Perhaps USD vulnerability will increase out ahead if
inflation continues to firm and the US trade position weakens further.

SPX -- Weekly

Fundamentals
The argument here over the past three years is that the market can rise in sustainable fashion even
without  the strong tailwind of primary liquidity growth from the Fed. In positive cases like this,
the private sector assumes the role of funding economic growth and a rising stock market through
internally generated funds and through the credit window via banks and other credit intermediaries.
Both the economy and the stock market struggled for the past nearly two years after the Fed shut
off the spigots. But, as this past year wore on, the economy has slowly recovered its footing
and the market has moved along with it. So, a positive economic environment has been regained
and can be sustained so long as major imbalances do not develop. The labor market is obviously
tightening, but there is slack in production and some in the services component as well. By today's
computer analytic capabilities, business inventories remain elevated, but have fallen to manageable
levels. Bank balance sheets remain liquid, so there is ample lending capacity available. Inflation
has been accelerating but remains modest. The Fed is now more active, but short rates are
accommodative as rates remain negative in real terms. So long as the economy can grow moderately
without triggering off both stronger inflation and rounds of tightening by the Fed, the stock market
p/e ratio, although very generous, is primarily vulnerable only to troubling external events.

I still want to see business sales fulfill the promise of the forward indicators and continue to
improve in performance. As well, I have my biases, and with a global economy not yet that far
out the tank, I have serious concerns about a Trump administration and how well they can
manage the path to genuine stability. Pundits and strategists continue to regard the incoming
crew positively, but, if I may speak colloquially, I fear this group can fuck things up to a
fare-the-well.

Technical
The weekly chart remains positive, but an intermediate term overbought condition is developing.
SPX Weekly

Global Economic Supply & Demand

Despite moderate global economic recovery over 2009 - mid-2014, excess production capacity
remains a worldwide problem. Following a period of intermittent inventory restocking during the
during this period, the capacity excesses resurfaced with a vengeance as global production and
trade slowed over the past nearly two years. Emerging market production began to improve
in early 2016, and the rest of the world has gradually followed suit, signaling a return from very
slow growth and deflationary pressure to prospective moderate growth.

Historically, bouts of inflation start in the commodities sector. Over the past year, a broad measure
of industrial commodities has jumped by over 27%, paced by a partial recovery in fuels prices. The
even broader CRB commodities market has recovered by nearly 15% over the past 12 months.
$CRB Weekly

The commodities markets have seen capacity reductions in various sectors since 2014, but excess
remains. My long term macro model for the CRB composite has breakeven in a range of 300-
335, with the low end of the range reflecting the positive impact of lower oil and fuel prices on
the cost structures of non-fuels commodities production.

Even so, with stronger global industrial output growth underway, commodities prices can
recover further, and should global production rise from the low of 1% seen in early 2016,
back toward more nearly respectable 2.5% during this year, the CRB can rise substantially more
and put added pressure on a rising inflation rate. That would strongly suggest more upward
pressure on interest rates and downward pressure on the p/e ratio of the stock market.

SPX -- Daily

The Trump rally reached a short term overbought around mid-month. Since then, the SPX has
been correcting and has moved down to a neutral on a momentum basis although RSI and MACD
are declining. The pattern of the market's rally since early 2016 has been one of a sharp up move
followed by an extended topping process and completed by corrective action down to test the
200 day m/a.  SPX Daily


If the pattern holds suit, it may be early in the "topping" process, but the corrective phase likely
would not run its course until the first couple months of the new year are completed. In this scenario,
the Trump plans for the economy would hit a bump as market players assess how truly likely it
is to pass muster with the Congress and, encompass another Fed policy meeting as well.


But, just as history shows stock market patterns change, so might this one as well, with the
opening weeks of 2017 to tell the tale. Given the period of political testing that surely lies ahead,
I merely suggest that you keep continuation of the 2016 rally pattern in mind.


And speaking of politics, the Trump crew will be facing another issue. Pushing the economy to
grow faster in the shorter term when it is already well along in employment and when signs of
faster inflation are evident invite an eventual economic overheating and possible subsequent
recession that, depending on timing, could be politically damaging to The Donald's re-election
chances. If instead, the new administration acts in a leisurely fashion and allows for a degree
of disappointed expectations to take hold in the economy and the stock market in 2017, he
might wind up in better shape in 2020, should he choose to run again. Believe me, this
discussion will take place if it has not already concluded.

SPX -- Monthly

Fundamentals
The market closed out the year nicely positive. My projection for the SPX, made 15 months ago, was
that the market would close out at 2160. Instead, it finished the year at 2238 or 20.7 estimated 2016
net per share. I foresaw rising earnings, but not the premium multiple. I expect net per share for the
SPX to rise to $120 - 130 for 2017, but accord only a p/e ratio of 17.6x based on a rise in the
inflation rate to 2.4% and a few more hikes in short rates. So, this puts fair value at about 2200 for
the SPX, or nearly 6% below the 2016 close. This value is well below the consensus range of
SPX 2300-2500, and reflects an adjustment to the p/e ratio for a pick up of the inflation rate,
something most other forecasters give short shrift to. I also assume that earnings benefits that
might flow from a Trump policy of fiscal stimulus will more likely arrive in 2018, and allow
risks to earnings from possible Trump restrictive trade and immigration policies not included in the
consensus calculations.


Now, one has to recognize that the SPX itself is on trend, when extended, to rise to 2500 by the
end 2017. Playing 'extend a trend', however implicitly, is no small pastime of Wall Street, so there
is a neat fit with the strong idea that the new administration is going to be very business friendly.


With the old adage that 'the trend is your friend' in mind, and with no red flags yet on probable
SPX net per share and the vigor of inflation, many investors and traders will probably go along
with this high powered projection. You might keep in mind that the SPX could decline this
month to 2100 and not upset the apple cart.


Monthly Chart
The chart shows a continuing cyclical bull but one with very subdued momentum since the end
of 2014. That's when the Fed tightened policy substantially by freezing the monetary base and
its own balance sheet. it also reflects a down wave in economic activity and in profits which has
started to reverse recently. Importantly, the monthly MACD has experienced a positive cross-
over and is trying to lift. The bottom panel shows a broad range oscillator and reveals the
best entry points for this market (when the oscillator falls below 50%). At present, the
oscillator is moving up toward an overbought.  SPX Monthly


Oh yeah. Happy New Year.

Oil Price -- Weekly

The oil price is experiencing its strongest year end close since 2012. This is happening despite
the fact that Oct.-Dec. is a very weak seasonal period. Fuel demand may have picked up some,
but the major reason is that traders have developed conviction that the OPEC-Russian supply
cut deal will hold going into 2017. Compare this year with last year when the price went into
free fall.  WTIC Weekly

The consensus for the WTIC trading range going forward remains at $40-60 bl. Price targets for
the seasonally strong spring of 2017 are starting to inch above $60, but most players are behaving
in a reserved fashion because Jan.-Feb is a seasonally weak period and since consensus supply
data for the final quarter of 2016 is not widely available. As of now, net oil producers are enjoying
a strong rebound in per barrel realizations compared to last years' disaster.

Production cut accords nearly always involve cheating so producer output data out ahead will be
carefully reviewed to determine if there are threats to the basic agreement. Traders will also be
watching US supply and the rig count to see if this now important new swing sector will inhibit
price recovery next year. Breakeven for the entire industry remains around $55 a bl. so deals are
out there if recovery progress holds.

The oil price is currently in a cyclical rebound stage with ascending tops and bottoms amidst
the usual volatility. WTIC is mildly overbought and is at a healthy premium to its 40 wk m/a.
One trader concern is that long side speculator interest is at record high levels just as it was in
in latter 2014 when crude made the important interim top of $105. Let's call it a very crowded
trade.

SPX Weekly -- God Rest Ye Merry Gentlemen

We may well need that rest for 2017. Even the bulls are concerned that the Jan.- Feb. period may
bring some corrective action as Trump rolls out his programs and tweets it all out with an official
imprimatur. And, the Fed will be around, too. The kindling has already been tossed into several
dumpsters as well. There is a nuclear arms one, and several for China, including the one China
policy, and the prospect of tariffs. Immigration policy will get a few, especially since California
is sending ominous signals of resistance, and there will be a chorus of loudmouths in the cabinet
and advisors like Carl Icahn to set off a couple of dumpster blazes. With the Donald, conflicts
of interest will be the norm, and the issue of high crimes and misdemeanors may eventually
arise if the GOP happens to reach a point where its fortunes, now seen as good, are threatened.
Pence will be viewed  as fine in a severe pinch.

Fundamentals
Weekly cyclical fundamental indicators continue to trend up, and the economy finally showed
signs of stronger growth in Q3. Hardly all is well yet. On a monthly basis, my proxies for total
business sales are doing a little better but expansion is still a bleak +1-2% yr/yr. Corporate
profits, helped by higher fuel prices for oil and gas producers, are recovering. The weekly
indicators, which the market has followed carefully since Feb., promise more growth as well as
inflation to come. Absent argument about valuation, these are positives.

Technical
The post-election rally has proceeded damage-free and has only been encumbered by recent
consolidation. The Dow 20K baseball hats sit at the ready in a NYSE storeroom. The up leg in
the market since Feb. is extended relative to its trend line and is moderately overbought at 6%
above the 40 wk. m/a. RSI and MACD are directionally positive but are approaching overbought
territory. Continued consolidation in the SPX or worse next week would fracture the post-
election trend up and raise eyebrows.  SPX Weekly

Stock Market

Consensus View
The e-inbox is stuffed with market forecasts for 2017. Based on a rather broad survey, seers
are looking for the market to range between SPX 2300 - 2500 for next year, with 2400 a suitable
mean. the hope is that a Santa rally will allow the market to close out this year at new highs. A
popular idea is that corrective action will set in sometime shortly after the new year as skirmishes
with Congress are set off after the inauguration when Trump rolls out his fiscal policy programs
and his cabinet appointments are debated. However, the overall view is that Trump will get the key
tax elements of his program through and that the economy will thread the needle in the new year
via moderate economic progress that is not sufficiently rambunctious to trigger off a sharp rise
of inflation or nasty action by the Fed. Because economic growth will not be that strong, we will
witness a sort of dwarf goldilocks economy. Presently, economic indicators are positive and there
is an as yet not adequately tested longer run cyclical trend line that runs out to 2500 at y/e 2017.


Most fundamentals - based forecasters seem to expect SPX net per share to reach a range of $125 -
$130 next year but there is some considerable disagreement over what p/e ratio is appropriate
to select based on differing views of how much inflation the US will get and in turn, how
aggressive the Fed will be in boosting rates. But, very few forecasters see a p/e ratio below 18x.
I think this stems from the idea that 2018 will see another year of strong earnings.


My Thoughts
The consensus view is too elegantly crafted in my view. Total business sales have improved, but
are still very modest. And, if orders do continue to pick up and inventory excesses are further
trimmed, eventual pipeline filling will put surprisingly strong upward pressure on prices, thus
forcing the Fed's hand. Plus, we are talking Trump in 2017. Maybe he will succeed in putting
more money in peoples' pockets, but he is easily 30 years behind the times and the macho
buffoonery elements to his 'America First' view cry out for geopolitical challenges. He is set
to make the US and rest of the world more volatile. I see egomania and a penchant for
insistently fanciful thinking. The US is sharply divided and his antics could create additional
social pressures.


Technical
The SPX chart shows an intermediate term overbought condition is developing.  SPX Daily

USD -- Significant Overbought Developing

From mid - 2009 through 2014, US monthly export sales increased from $120 Bn. to $200 Bn.
Now, global economic growth has slowed since the initial phase of economic recovery, but a
much stronger USD since late 2014, when the Fed first tightened monetary policy, has no
doubt contributed in a major way to export sales weakness since then. Since the economic
recovery began in 2009, I have been bullish on the USD because longer term economic
fundamentals have gradually turned positive relative to the rest of the world. I have been
projecting a gradual climb in the value of the dollar from the low 70's to 100 by 2020. I am
not a fan of a very strong dollar because it encourages nasty mercantilist policies from Asia
and Germany. So, I am happy to see a USD overbought. $USD -- Weekly

The chart shows a developing, significant overbought condition for the dollar based on inter-
mediate readings of RSI, MACD, and the Keltner bands. USD price action is less sensitive to the
indicator readings in the shorter run, so one cannot say for sure that a downward hit on the
currency is imminent.

The bottom panel of the chart shows the gold price. It has been hammered recently by the sharp
increases in both the USD and the stock market. A retreat in the value of the dollar, even a
temporary pullback of 3-4%, could give the gold price a tradeworthy lift.

Liquidity Cycle & Monetary Policy

Good to Its word, the Fed zeroed out the growth of Fed bank credit and the monetary base about
two years ago. Since then and as is typical, the economy lost most of its growth momentum and
the stock market has been anemically positive. The end of all quantitative easing resulted in a
substantial but not fatal tightening of monetary policy. The lackluster US economy has been
funded by the private financial sector. Not only did the private finance not fold its tents, it
provided sufficient credit to fund a slow, deflation prone economy with excess liquidity to
support both rising bond and stock prices. However, as the economy slowed down, the growth
of private sector liquidity did as well, and now with signs that the economy and the inflation rate
have accelerated, the growth of excess liquidity has shrunk, and it has become far more diffcult
to fund the capital markets. The big casualties have been the bond and gold markets.

With a stronger economy and more inflation, the private financial sector will respond by providing
faster funding growth through the loan windows. For this to happen, the Fed will have to move
to tighten policy further gradually so as not to create a liquidity squeeze via taking action that
flattens out the yield curve. If there are larger fiscal stimulus plans that come on the board over
2017 - 2018, The Fed will have to accommodate them up to a point so as not to choke off the
economy and provided the inflation rate does not accelerate too rapidly. US policy will have to
watch carefully the developing supply / demand situation in the oil markets as well because
if oil supply becomes meaningfully restricted, a rising oil price will push up the inflation
rate and lead to a significant wealth transfer from net oil consumers to net producers.

But, perhaps it is wise not to get too far ahead of ourselves. For a more nearly normal liquidity
cycle to play out, the US has to show first that it can sustain a faster rate of economic progress
and that It is finally overcoming the squeeze on primary system liquidity that comes directly
from the Fed. Recent economic data finally reflects a positive beginning to the process.

SPX Weekly -- Up and Up There!

The continuing rally has shown enough conviction and momentum to count as a breakout and
not a mere blip over a two year long trading range.  SPX Weekly

It is significantly overbought in the very short term, but has yet to reach levels on the intermediate
term weekly chart that would warn that a substantial retracement is in order. The market is now
moderately overvalued and strategists are busy playing with the SP 500 net per share to bring
the p/e multiple down to levels where buyers can feel more comfortable joining the chase. Using
GAAP accounting, and recognizing economic performance and oil company profitability are
moving forward, it is not a stretch to come up with an estimate for SP 500 operating net of
$120. per share for 2017. Yet, with  Trumponomics entering the equation, estimates for 2017
are now being ratcheted up to $140. This compares to 2016 net of about $108 per share. This
particular game is about 60 years old give or take.

The SPX is now about 13% above the upper band of its Post WW 2 trading range. In terms of
recent history, the market is behaving like it did in 1996 and 2004 when it ran above the top
of the historic range for several years until it collapsed upon encountering rising recession
prospects. You can maker good money during these periods of unbridled longer term effer-
vescence and lose your shirt when folks get wind that a economic downturn could be at hand.

At my leisure, I have been doing some thinking about the longer run prospects for The Donald's
presidency. In a nutshell, he is 30 years too late. Most all of the horses he rails about are long
gone from the barn and the views of his cabinet picks are as well. The world continues to
grow rapidly around the USA and The Donald's views are especially, painfully reactionary.
My grandson of 18 years is a techno - wizard with pals of many ethnic stripes and e- buddies
around the world. Perhaps talking with him as I do will keep me better informed than Wall
Street.

Gold Price

The gold price is volatile as we all know. But it has been hard to handle this year even so. There
was a good long side counter trend rally early in 2016.The oil price was turning around and the
inflation rate was in bottoming mode. The positive price action in gold got out of hand as the year
wore on and on Jul. 10, I cautioned both gold and silver were overbought on record speculative
interest. Gold hung around briefly but has since tanked 15%. This is not your father's gold market.
Since the 2002 -03 period, long side speculative interest has increased by six fold and the
curmudgeonly old bugs who used to haunt the market have been swamped by large pools of fast
money, especially hedge funds. With the US dollar picking up again in Oct., and the stock market
in rally mode since Nov. gold has been shunned and now sits $200 oz. below the highs of this
summer.

Gold has experienced a bearish 50 day m/a  /  200 day m/a cross and although it is still above the
lows for the year, is now sharply oversold with speculative interest waning quickly. The dollar is
easing off, but the stock market, although overbought, remains strong short term. My economic
and inflation directional indicators remain positive, which would normally help gold's case, but
the market may await short term damage in stocks before gold can stabilize. Moreover, there
are gold players who trade off the oil trend and black gold has recently leveled off.

Such are the headaches of playing counter trend rallies.  Gold - Daily Price

Oil Market / Price

The view here has been that even though there is a good chance that global oil demand / supply
will come into reasonable balance by the end of 2017, producers pressured themselves to reach
an output cutting agreement this autumn rather than face another early winter sharp seasonal
drop in the oil price. And, presto!, the boys have an agreement with Saudis and OPEC taking the
lead. Everyone knows there is going to be cheating, but the hope among producers is that the
price will hold over the next couple of months, some cheating notwithstanding. By Feb., the
process for gearing up output to ready for the peak drive period will be underway and the
industry can start looking to seasonally higher prices. A consensus is emerging among industry
observers that crude should trade between $40 - 60 bl. in the months ahead.  WTIC Weekly

The oil price began to turn positive early in '16, but currently remains tentative until crude
begins to clear $50 on the upside. Good to remember that with weak demand, no one would
be shocked if the price tested the $40 area again before moving higher again in late winter.

Consensus is that the entire oil output industry becomes profitable again around $55 bl. As
shown on the chart, the current 52 wk. m/a is about $42.50., so the boys are still running well
in the red on an annual basis. The bottom panel of the chart shows the 52 wk. ROC% for
oil. It is now strongly positive, so producers are going to show less awful results and SP500
net per share will receive a nice shot in the arm going forward. With oil price momentum
improving you can also expect higher inflation readings around the world.

Producers plan to re-visit the production curtailment around the end of May. If there is not
widespread cheating, the emphasis will be on whether there has been any progress in paring
the outsized inventories of crude and byproducts. I doubt now that there is much of any
consensus on where the oil price may be later in 2017.

SPX-- Monthly

Back on 10/2, the monthly MACD indicator for the SPX had just experienced a positive cross
and because I trust the indicator, I suggested the market could be poised to rise in the months
ahead. I suggested in the title that we could be entering a 'brave new world' because of how
expensive the market is and how hyper extended it is on the very long term, post WW 2 SPX
chart. The implication then was that a fresh uptrend could be starting for the current cyclical
bull market. Well, the market has gone on to new highs in the interim, but, of all things, the
positive cross for the MACD indicator is in virtual stall mode as price momentum has not been
strong enough to push it strongly higher.  SPX Monthly

So, we can give the indicator credit for the recent rally, but I think it is fair to say the jury is
out on sustainable positive price action going forward. You can if you want claim that the
market is on the overbought side currently and when it settles back, more positive action will
ensue and vindicate the monthly MACD. Could be, but I am in no hurry.

SPX Daily -- Overbought Short Term

The cyclical bull market continues despite the recent but doggy two years. The market has
rallied recently to a possible major breakout point, but in doing so has moved up to a short
term overbought position of consequence.  SPX Daily

As with the other rallies we have seen this year, the early phase has taken the SPX up to an
extended position relative to a newly drawn trend line and thus leaves the market with
plenty of room to consolidate or correct in the near term without a clear violation of trend.
Naturally, the chart hardly precludes the market from going higher in the near term, but it
does suggest the train may not entirely clear the station without leaving another entry point
that may be more pleasing to those inclined to add more to long positions.

Holding the Trump bandwagon aside, fundamental cyclical directionals support more gradual
progress, and monthly economic data appear to have firmed although on-the-ground
performance still lags the directional indicators. Investors and traders are also keenly aware
that history favors the Nov. - May period as seasonally positive. As well, the doggy action
in the market since the highs of 2014 is likely whetting some appetites for a strong, positive
breakout.

The Trump buffs are excited about his proposals to cut taxes sharply, establish sizable
upgrades to infrastructure, and allow companies to repatriate foreign held liquid assets.
They have rejected the idea that the negative Trump ideas of new demands on trading
partners, disruptive pursuit of illegal immigrants and a rebuff on climate change will even
see the light of day. These rather selective menu picks may be just right, but other critical
issues are still being ignored such as an economy already near full employment, and budget
deficits that may prove only slightly stimulative if they drain private and public savings as
they are financed.

The next three months will also bring an eye opening experience of the periodic three alarm
dumpster fires that Trump creates as he goes along. We New Yorkers have known him for
nearly 40 years and we can only guess at the chaos he can promote on a world stage.

Stock Market Profile -- Weekly

Fundamentals
Cyclical directional indicators are tracking positive. Excess financial system liquidity is positive
but shrinking owing to faster economic growth and inflation. With the Fed having frozen Its part
of liquidity since late 2014, I favor trading the market and only going long on deep oversolds.
Business profits are beginning to recover but remain under peak 2014 levels.

Technical
The market rose to a new high this week. It is modestly overbought. Watch to see if the MACD
can stage a positive reversal. Note that uptrends now in place have not been tested by any pullback.
The market is a tad over 5% above the highs of 2014. The advance to new highs in 2016 counts
as a flimsy bull episode in my view and awaits more robust positive confirmation.
SPX Weekly

Valuation
The market is clearly overvalued on the various measures I use. Fair value presently lies in a range of
SPX 1990 - 2050.  Currently, the SPX is trading about 9% over the mid-point of the fair value range.
The premium primarily reflects the fact that market players have yet to trim the p/e ratio as they
should when the inflation % accelerates. Folks are now smitten with the presumed economic benefits
of a Trump presidency and the evidence at hand that balanced fund managers and hedgies are
reducing bond exposure in favor of equities.

Sentiment
Bullish sentiment is elevated among advisory services, but is fairly neutral among players who
are actually trading the market via options.

Long Treasury -- At Deep Oversold

In a Jun. 20 post, it was argued that the long Treasury price was "steaming toward an overbought."
And it got there, registering a major intermediate term overbought. Now, there is a flip side, with
the TLT long Treasury ETF having just sold down to a deep intermediate term oversold.
TLT Weekly

Bond price directional fundamentals began turning negative in early 2016. The deterioration has
been mild but persistent. Absent has been the strong production growth and heavier resource
utilization that puts hefty upward pressure on inflation and galvanizes the Fed into tougher
restrictive action. With only nominal cyclical pressure, bond players ignored the warning signs
and bid Treasuries sharply higher into early Jul., ending  the run with what appears as a blow-off.
The market has trended down since, and has recently tumbled as bond traders have come to
believe that Trump's election will involve heavy fiscal stimulus that will accelerate real economic
growth as well as inflation, and will also result in a large increase in deficit federal financing,
with the Fed to follow by pushing short rates higher.

These new concerns could all turn out to be true, but if so, their realization will take considerable
time and may not be strongly evident until 2018 at the earliest. In the interim, questions are bound
to arise about whether the Trumpistas can pull their fiscal program off and whether other initiatives
from The Donald on trade and immigration may work as growth deterrents. This leaves the question
open whether the current stampede out of bonds will overdo it by enough of a margin to produce
an eventual counter-trend rally in a heavily oversold market.

Near term, TLT is moving toward a respectable support level down around 115.

Whatever, bond players might do well to begin to try and factor a volatility premium into
their pricing models to account for an apparent reduction in primary dealer market making
capability as a result of post 2008 financial system regulation.

SPX -- Weekly

Fundamentals
The stock market has tracked my forward looking weekly cyclical fundamental indicator very well
this year. This index has flattened out since Sep. and is in line with the recent toppy action in the
market. Interestingly the economy and corporate profits have seriously under performed the
indicator so that the market has been running well ahead of on-the-ground fundamentals. The latest
rally primarily reflects players buying well on the come in expectation of a Trump / GOP Congress
fiscal stimulus plan presumably to be unveiled early in 2017.

The Fed continues to hint that short rates will be raised soon. A classical cyclical case for a rate
increase is not yet in place, and the Fed has also taken to hinting that rates may be raised to keep
markets from getting too effervescent. With inflation already accelerating and a Trump fiscal
goose to the economy now widely anticipated, the bond market is folding its tents and has shifted
some funds into equities from fixed incomes. With bond yields trending sharply higher near term,
it will be interesting to see if the Fed feels compelled to raise the Fed Funds rate in Dec.

So far, stock players have yet pause to see if there are further assurances from the Trump camp
on stimulus and, if the Congress is willing to go along with the large deficit financing that will
be entailed. GOP conservatives like the tax cut proposals but are indifferent to the infrastructure
plans while the Dems are thumbs down on tax cuts for the wealthy, but like the spending plans.

Equities players will have to watch all this carefully because the industrial side of the economy,
where most of the earnings leverage is, continues to perform poorly. Not only that, but wage
pressure is starting to run well ahead of pricing power, which crimps profit margins. As well,
what if stimulus programs are dinky?

Pauses and / or corrective action in the Trump rally should come as no surprise until matters
are further ironed out.

Technical
For the current uptrend in the SPX to be of substance, the market needs to take out the previous
highs of the past summer in a convincing fashion or else the SPX will face a possibly troublesome
'secondary top.'  SPX Weekly

It is not easy from a technical perspective to have high hopes for the current rally as it comes off
a rather shallow oversold.

Gold Price

The argument here early in the year was that there was a mild cyclical case in support of gold. The
rally that ensued became outrageous and took gold up to a huge overbought and record setting
long side speculative interest by the summer. The metal was fueled by a fast rising oil price, Brexit
and uncertainty concerning the US election. The oil price has weakened since, Brexit has quieted
down as an issue and players have voted for equities over gold since the US election. Looking out
into next year and with the reasonable assumption the US will see fiscally stimulative fiscal policies,
there is still a mildly cyclical positive case for the gold price to rise. Short term, gold may remain
hostage to a seasonally weak oil price and possible US dollar volatility (See third panel of chart up
next)  Gold Price -- Daily

Gold has swung from a big time overbought to a moderate oversold and sits atop a $1200 - 1225
support zone. Since the knife is still falling, and given gold's natural volatility, only heroes will be
stepping up now. More settled players may wait to see if the oil exporters can reach a production
curtailment agreement that is not set ridiculously high before year's end when another painful
seasonal down leg in the oil price is in store. As well, hedge funds like gold as a haven to park
money when the stock market takes a hit. Since there could be slips between cup and lip for
the current equities story, do not turn your back on gold.

The Stock Market As Best As I Can Figure

Back on 10/27, I opined that since the classical conditions for a bear market had not been met, it
was likely premature to write the obituary for the current cyclical bull. The uptrend that was in
place since Feb. of this year was clearly broken by the recent Aug. / Oct. corrective action. and
one could argue that this last leg up through Aug. was the third and final one. But I thought it fair
to wait on that call because it was not underwritten by a clear negative fundamental picture.

The market is now in a seasonally strong period that could last through early spring 2017. Profits
appear to be turning up, and both candidates for the presidency did have fiscal stimulative
measures on their agendas for 2017. Trump's was far larger in scope and with the GOP set to
take the White House plus both sides of the Congress, market players have become re - energized
and have rallied the market strongly from a moderately oversold condition. The SPX bounced up
from its 200 day m/a and awaits further confirmation from a positive reversal of the 25 day m/a.
SPX Daily

We do not know the fate of Trump's stimulus proposals but investors seem willing to bet that
sizable pieces of his tax cut and spending programs will pass, thus buttressing the economy and
profits through next year and into 2018. Sharp upturns in longer dated Treasuries also suggest
fixed income traders agree as they are beginning to factor in higher inflation from faster growth
and increased utilization of capital resources. The roughed out projections for next year also
signal that the Fed is likely to raise short rates to keep inflation in trim. With a larger Treasury
calendar in prospect along with stronger business pricing power, there may also be some rotation
underway from bonds into stocks.

The chart linked to above shows that rapid rises in RSI are often followed by market pullbacks,
and the combination of Trump stimulative measures, should they eventuate, along with probable
Fed tightening may well be a recipe for increased market volatility in the months ahead.

As well, there  could be a substantial timing issue involved regarding Trump stimulus programs.
If he is interested in re - election, fast enactment of tax relief and higher spending issues could
produce an overheating economy before 2020, and leave Trump in a tougher political situation
at that time.

Finally, the US is experiencing social tensions that are running just below the boiling point.
These acute social misgivings should eventually recede, but political miscues in the early
going of the Trump presidency could create further fracturing of of the public's mood that
might affect business and investor confidence.

The Trump We Know....

It's a little disconcerting to realize that The Donald won the Presidency, but was booed when he
showed up in NYC at PS 59 to vote and that he was creamed by NY voters. We are sending him
off to Wash. DC to be enjoyed by all, having failed to keep him to ourselves. So what can you all
expect? Well, right now he is fashioning himself for the office, trying on different guises to see
which one best suits the seemingly limitless ego. Should he play the hard nosed 'America First'
right wing populist, or now that he has captured the office, perhaps he will pose as the firm but
beneficent uniter, pulling those from left and right of center in grand schemes to regain our lost
glory? Or, perhaps he will be a bored protaginist who lets VP Pence and others do all the heavy
lifting.

Figure that whatever, he does not live in your world. You live in his. And figure that the world
is about to become an admittedly very large subsidiary of Trump Inc. A subsidiary who he hopes
he can nurture into a cash cow that can sustain his company and "brand" for posterity. Through it
all, he will do some good and neat things and he will do some very wacky and irresponsible things.
And, remember that even if you live in Podunkistan he will touch your life.

It falls primarily to the US to try and contain and control this guy and it may be necessary for
you, if you are a foreigner, to help out on occasion. Keep in mind also that if you are part of
the shifting and jostling herd that challenges him, hits him as they say, he will hit back hard.

In my years on this earth, I have been genuinely intrigued by few leaders because of their
compelling humanity. They would be Jack and Bobby Kennedy, Dr. King and Barack Obama.
The Donald is more of a case study in egomania and not an engaging person and leader.
I plan to be a mere pale shadow in Trumpworld, and to keep my head down and my
distance.

Wish you all the best.....

SPX -- Daily

The FBI took Hillary off the hook yesterday, and market players showed they were worried about
The Donald via today's rally which suggested Hillary could gain enough momentum to win
Tuesday. Zippy stuff. Now the stock market did correct over the Aug. - Oct. seasonal 'jitters'
period and traders know we are moving into a seasonally strong interval which can last into the
early spring of the succeeding year. So, not only did players affirm hope for a Hillary victory,
they may be using the market's oversold position to get a jump on positive seasonals.

The bounce in the SPX came off the 200 day m/a and was strong enough to wipe out the Trump
dump that had gathered. Well, this all could work out just dandy, but Hillary needs to pocket the
win, and then The Donald and the Trumpkins have to behave and accept the verdict if it supports
that 'awful woman'. The bitterness and rancor of this campaign probably even exceeds the ugliness
some of us old timers saw during the twilight of the Truman presidency, 1950 - 52. Most folks here
think the very hard feelings will continue for some time and  require now vanished statesmanship
to reappear to get a  government in failure mode back on the rails again.

Prudence is a vice in a bull market but a week's worth of intense vigilance may not be fatal.

SPX Daily

SPX -- Daily

Finally, a frisson of fear that The Donald could actually win this thing, or at least create chaotic
post election uncertainty. And, of course, it's Fed policy decision week. So, there was strain in
the market today, and short term 'double bottom" support at 2125 was violated, leaving the market
in corrective mode.  SPX Daily

The chart indicators show a down trending market and an approaching oversold. However,
on a price momentum basis, the SPX is at a very shallow oversold and could fall another 5%
in the very short run before it gets hefty.

The economy has gradually firmed in recent months, thus giving the Fed a little more cover  if
it would like to raise the FFR% another notch. Current indicator benchmark standards are not
up to post WW 2 standards, but are headed, albeit slowly, in that direction.

Trump? The guy is an egomaniac and a demagogue and scares many bright, worldly people.
If he is starting to surge in the closing days of this abysmal election, there could well be
preemptive defensive action that I would not care to guess beyond saying that gold could
have a bounce.

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.