SPX -- Monthly

The monthly chart for the SPX has provided pleasant and easy reading since late 2011 as
there have been no genuine, threatening moments. That has changed with the Jan. 2015
edition. SPX Monthly


The chart still shows the SPX in a cyclical bull market. More controversially, I regard the
market to be in a long range bull dating back to 1982, as I read long term market charts
epochally as outlined in the 12/30 SPX monthly post.


Chart trend lines dating back to 2011 have recently been violated, but without sustained
negative follow through. There has been an elevation in volatility, and the short run direction
of the market as measured by its 25 day m/a is essentially flat even though the longer run
direction remains up. However, there are worrisome indications now on the monthly chart.


Note the 14 month RSI. It has been in an uptrend since early 2009. it was closing in on
a substantial overbought level toward year's end 2014, but the uptrend has been broken in
recent months and has turned down. The break in RSI is a warning or cautionary sign.


Of more importance is the near break in the monthly MACD shown in the panel right below
RSI. Looking back over the past 20 years, breaks in the monthly MACD have coincided with
either significant price corrections or the development of bear markets as in both 2000 and
2007. Now, rising MACD has yet to be be violated and the market can, in turn, rally up
in the next month or so. However, since changes in trend for the monthly MACD do not
occur all that often, it is worth noting how tenuous the position of the SPX is just now.


The cyclical conditions for the development of a bear market are not in place, but a break
ahead in MACD, if only for a few months, could signal a market correction as occurred in
201l.

Oil Price

The oil price has tumbled as all know, but it has still been following the longer term seasonal pattern.
Oil is now in a respite period in a weak seasonal interval which should wind up around late Feb.
Back on Dec. 23, when WTI oil was around $55, I opined that the lack of a rally then signaled that
oil could fall to around $40 by the end of Feb. '15. before the seasonal rebound period began. Let's
see how that goes. I think oil below $40 in the near future would begin to look like mindless
overkill. Oil supply / demand fundamentals simply do not look that bad especially with the
Eurozone, Japan and China now easing monetary policy. Moreover, the price of crude is now
extraordinarily oversold relative to its 200 day m/a. $WTIC Crude

The longer term uptrend in the oil price has been broken decisively. The US rig count is dropping
off, and crude output may eventually weaken. But the cat is out of the bag here. The oil shale in
the US is still here and there is plenty of it. The technology to retrieve it has developed remarkably
and continues to arc ahead. Others will copy it or buy it. Globally, there may be a lengthy period
before the oil price scales the heights again. But, as ever, there will be trading opportunities with
the next big test set for the end of Feb. if not a little sooner.

$ Gold & $ Oil

Early Jan. - mid - Feb. is a positive seasonal time for the gold price. As in early 2014, gold is
again off to a strong start on the year reflecting a struggling stock market, as some equities
players drift over to play the metal. Back in Nov. I tried a very roundabout case for gold in
2015. I did not specify when, but I was thinking gold had a good shot at firming up in the
latter half of 2015.Gold Price

However, what has caught my eye this year is the relationship between the gold price and the
price of oil. The old rule of thumb here is that it should take 13 barrels of oil to purchase an oz.
of gold. So, the "standard" relative price index (RSI) for gold-to-oil should be 13 to 1. The
linked to chart that follows shows gold's RSI to oil for the past three years. Gold : WTIC Crude

As shown gold's RSI has more than doubled the long range norm of 13 to 28. This ballooning
of the RSI primarily reflects the dramatic decline in the price of crude over the past six odd
months, and leaves gold very strongly overpriced relative to the price of oil. I am mostly
interested in the gold price as an inflation hedge and since oil has been a primary leading
indicator of the inflation rate for over 100 years, gold now sits at a disturbing premium. This
is not to say that the price of gold needs to weaken dramatically, but that the gold price can be
seen as discounting a major rebound in the oil price such as has occurred during prior periods
when gold sold at more than 20 bls. It might also indicate that should the global economy,
excluding the US, firm up later in 2015 as outlined in the Nov. piece noted above, the US $
might lose strength and the oil price might bounce up on a  weaker $ and stronger oil
demand. May be worth thinking about.

Economics & Profits Indicators

Coincident Economic Indicator
Reflecting the power of stronger liquidity growth from the Fed's QE 3 program my coincident
indicator, measured yr/yr, rose from 1.0% in mid - '13 to 3.0% for Nov. '14. The +3% reading
was the strongest since early 2011, and represented solid, balanced growth. The CEI slipped
to 2.5% last month reflecting weakness in real retail sales and production following a strong
Nov. The slippage was not enough to derail the trend of improvement and I await Jan. data
to see if the trend remains intact. The CEI for the final quarter suggests real GDP growth of
2.6% yr/yr.

Economic Supply / Demand Balance
On a yr/yr basis, production increased  by 4.9% in 2014. Capacity growth however, gained by
3.2% and registered its strongest improvement since 2011. Faster capacity growth has been
tempering the rise of capacity utilization thereby lengthening the time it will take for the
economy to overheat and tamping down cyclical inflation pressure. The relative balance
between productive capacity and demand gives the Fed more time stretch out a return to
policy normalization via raising short interest rates if it so chooses. 

Business Profits Indicators
US business sales before adjustments rose an estimated 5.7% in 2014. The US was a sales
growth leader among major economies last year, so many larger US based companies with
global reach did not fare as well on the top line. The powerful rally in the US $ over the last
four months of the year led to translation losses in sales and earnings for the globals as well.
Finally, the rapid decline in oil prices and related downstream items plus weakness in
sensitive materials prices hurt the petro production sector and basic industry sales and profits.

Business pricing power eroded sharply over Half 2, especially for basic supplies producers.
Ability of the average company to increase margins was enhanced by stronger volume
growth and constrained modestly by a mild selling price / cost squeeze and rising depreciation expense.

To conclude, a year of bright promise for business profits was constrained as the year wore
on and the same constraints are carrying over into 2015.

A Nasty May Be Ahead
Knowing senior managements as I do, I would not be surprised if plenty of CEOs use the
current weakness in gasoline and fuels prices to pocket cost benefits as consumers of
energy and try to muscle wage growth lower on the pretext that wage earners are getting
an enhancement to real wages via reductions in prices at the pump and for heating and
cooling. This spares margins but undercuts purchasing power in the economy.

Daily SPX & VIX

Here is an updated chart of the SPX plus the daily VIX (bottom panel) SPX

1) The market has broken both long term (from 2011) and shorter term trend support around
the 2000. This is the second time in three months that the SPX has broken longer term trend
support and, as you have guessed, indicates a laboring market.

2) As noted in the 1/6 post, the SPX has had trouble staying above the 2000 level since mid -
Oct. and here we are again, this time at SPX 1993.

3) However, the market has only threatened to break down in recent months and has not done
so yet. Given the powerfully consistent run up in the SPX since the latter part of 2011 with only
minor dips below trend, the market deserves respect until  there is a more decisive break.

4) On a momentum basis, the SPX is modestly oversold against its 25 day m/a for the shorter
run. The standard RSI is trending down and is approaching a somewhat deeper oversold and the
MACD is negative.

5)  The VIX -- a volatility index used by traders to measure fear in the market -- has been drifting
ever so slowly higher since Jul. with the occasional spikes when the market sells off. The low
level of the VIX  over Jun. /Jul. indicated nearly obscene player confidence and complacency
and is returning now toward more normal levels.

6) Traders who have gone long the market when the VIX has spiked above the 20 level in recent
years have been rewarded as part and parcel of a buy the dip in price strategy as the higher
VIX readings have proved transitory. Note of course that if the SPX is set to work lower, the
VIX will trend or even spike higher.

7) The broad market can be choppy over the first half of Jan. as investors tinker further with
asset allocation and portfolio equities strategy.

8) So far in 2015, my weekly fundamental indicators suggest a flat broad market relative to Dec.
and a slowdown in the erosion of sensitive materials prices (oil included). Naturally, this is only
a very quick snapshot
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I have had a fundamental buy signal on this market since early 2009. I do not use a "hold"
signal, so the "buy" stays on until I get a sell signal. The fundamental buy has not saved
players from sharp corrections in both 2010 and 2011. Further, there has been decay in
the signal as the "easy money" part of the cyclical bull has apparently past and much more
risk must now be assumed as a trade off against positive return.

Financial System Liquidity

Measured yr/yr, total system liquidity growth (including the Fed's balance sheet) grew by 6.7%.
this represents a substantial deceleration of growth from  11% early last year and reflects Fed
policy tightening via the QE 3 tapering and subsequent elimination. Liquidity growth has been
strong enough to fund faster economic and profits growth along with providing excess to to fund
the capital markets. With QE in the past, liquidity growth measured yr/yr is going to continue to
slow and should lead to more moderate sales and profits growth for business out ahead.

It is interesting to note that despite the strong liquidity gain in 2014, inflation pressure has
decelerated further instead of picking as it normally does. But, we are going through a period
global excess capacity especially in the basic materials and fuels sectors.

Note as well that cash available to larger investment organizations has been building in recent
months as policy towards equities appears to be turning more cautious. Cash ratios are up about
5.8% or $100 bil. This development is modest, but it has not been in evidence with consistency 
for quite some time.

The banking system is continuing its thaw. The loan book is growing is growing moderately.
Lenders are also expanding exposure to more conventional sectors. Balance sheet liquidity
remains exceptionally strong given that 2015 will represent the sixth year of recovery.

SPX -- Daily

Here is a link to the daily SPX using closing prices: SPX

 1) Both short term and long term trend support sit at SPX 2000 (long term support dates back
to late 2011). The market broke long term support at 1900 with the Oct. '14 sell off, but did
subsequently rally back into the rising price channel. Now there could be another test.

2) It is interesting that the SPX has experienced a little difficulty holding above the 2000 line
which was first crossed in late Aug. and shortly before the shutdown of the Fed's QE 3 program.

3) Nearly mindless herd behavior remains in effect as players have been drawn into steep
whipsaw action in recent months.

4) The market is a mildly oversold -2.3% below its 25 day m/a and is approaching an oversold
on RSI. The trends of RSI and MACD are down and not encouraging.

5) My argument for several months has been that without the QE program in place, fundamental
risk is now substantially higher and that return potential might be more restrained than in recent
years. An elevation of volatility is already evident.

6) I have also argued that the bulls have, since late 2011, used the powerful QE program as
a backdrop to push the p/e multiple up on the premise that low inflation and interest rates
support the idea that the discount or hurdle rate on the market would fall circa the 1960s.
Moreover, since this narrow focus strategy has been a winning one, I have pointed out that
its continuation would lead to 2500 on the SPX by the end of 2015 and a p/e of 20x.

7) But now we have to see whether the absence of the Fed at our backs will enable the
bulls to keep the narrow focus or whether other fundamental factors will work to challenge
the thrust to a higher p/e out in time. This powerful bull story has not been defeated yet.
We can see the waning of momentum in the recent action of the chart, but the kind of
sustainable trend break needed to shift the market trajectory to a less positive line and
away from the current still rapidly rising channel has yet to occur.

Global Economic Supply & Demand

Global industrial output measured yr/yr has declined from 4% in the early spring to 3%
recently. Growth may have slipped slightly going into year end. The reaction of the
commodities markets to this dissipation of demand growth has been spectacularly negative
in my view. Commodities prices are normally volatile, but I suspect the presence of  large
financial players has added substantially to volatility over the past ten years.

The outlook for global economic demand in 2015 is admittedly hazy. The world's four major
central banks -- The Fed, ECB and the central banks of China and Japan are not all on the
same page presently when it comes to liquidity growth. The US is unwinding a program of
very substantial liquidity expansion. Japan is only now beginning to see faster liquidity
growth after a year of central bank ease. China in substance is following a stop / go policy
which just recently veered toward 'go'. The ECB, where substantially faster liquidity growth
is advertised as just around the corner, is actually reporting a mild acceleration of monetary
liquidity expansion following an awful period of stop / go policy over the past five years.

When you use liquidity as a touchstone for future economic growth as I do, the current disparate
policies of the leading central banks makes for tough going when it comes to gaining a bit
of insight on the future. Presently global demand growth is still moderating and deflation
pressure remains on the rise. However, the reactions of key equity market sectors, currencies,
commodities and various segments of the bond market to the economic situation since the
spring of 2014 has been so powerful, that I wonder if much of this fallout is simply outsized
relative to what has transpired economically. After all, we are looking at a moderation of
global production growth from 4% to 3%, not the immediate onset of recession.

If global growth does accelerate later this year because of enough of a mix of private sector
credit flow to compliment more modest liquidity expansion, there could be powerful
reversals in overpriced markets like US Treasuries and The US dollar and deeply oversold
markets such as commodities and selected currencies such as the Japan Yen.

As a final note, the decline in commodities prices in general and sensitive materials prices
in particular has been strong enough to warrant watching out for the eventual mothballing of
of production capacity in some of the many markets that comprise these groupings.

Weekly CRB Commodities Chart + Industrial Commodities

SPX Monthly Chart -- Points Of Interest

Long Term "Progress"
By my way of thinking, the US has been in a bull market since 1982. Earnings and dividends have
progressed and with a deceleration of inflation and a lengthy downtrend of interest rates, the p/e
ratio has increased, especially over 1982 - 1993, as investors have bid down the discount or hurdle
rate required to find stocks attractive. The p/e multiple has held up despite more volatility of earnings
as companies have run more aggressive finance policies such as raising the earnings plowback rate,
buying in far more shares for the treasury, making many acquisitions using purchase accounting,
underfunding or eliminating pensions, and with the connivance of the accounting profession,
ruthlessly writing off their failures as "extraordinary items" instead of charging losses to operating
earnings. Most investors have applauded it all.

With decelerating inflation and globalization both making it tougher to generate pricing power,
companies have worked wonders slashing overheads and operating expenses. Investors have
welcomed this progress in increasing profitability. Investors who have called for a return of
profit margins back down to historical levels have been continuously frustrated.

 Most companies have increasingly focused on achieving investor pleasing short term results.
There are few very talented CEOs with the vision to grow their companies longer term, but
a goodly number of CEOs who have the ability to see around corners when it comes to their
own shorter run self interest.

What we have yet to learn of course is the price companies may have to pay for ignoring the
long run.

For good measure, and to keep the deflationary wolf from the door during this lengthy period
of "disinflation", the Fed has stood willing to provide copious amounts of liquidity when the
occasion required such.

On To the Chart
If you have been along for the ride, it has been good enough. Since year end 1993, SPX net
per share has increased by about 7.5% annually and the index has gained 7.7% per.
SPX Monthly

Looking at the chart and connecting the tops from 2010 and 2011, note that the market is
getting extended. Note also that the channel up from the low in late 2011 is not so extended.
If the latter channel stays in force and carries the day we will likely be moving into a giddier
blow off phase for awhile.

Watch the monthly chart as you go forward. The MACD over the past 20 years has provided
good guidance.If the blue line breaks below the brown one there may be trouble. Otherwise,
we may be OK. Note also the RSI trend which has been heading up since early 2009. A
break in that uptrend my also require your attention.

SPX -- Weekly

The Three Year Weekly Chart....
Since late 2011, the SPX has advanced relatively steadily in a low to high channel of 13%, and
has kept on a 20% average annual growth track. This performance has been reminiscent of the
spectacular 1995 - 1999 bubble run up although the current advance has been on a far more
moderate trajectory. If the SPX could sustain this strong pace through 2015, it would bring the
average up to 2500, a level well above what a very broadly positive consensus is forecasting.
Such an advance would bring the p/e ratio for the SPX to 20x, nearly double the level of
2011. There is non-bubble empirical support for another big year in that when inflation and
interest rates were low in the 1960 - 65 period during a period of stronger economic expansion,
the market did trade up toward the 20x level. Growth is not as rapid now, but interest rates and
the inflation rate are exceedingly low. SPX Weekly Chart

I think the major key behind the strong market advance in recent years has been the Fed's QE
programs both in prospect and in actuality. These programs have greatly boosted investor
confidence and have sustained a psychology of buying price dips, with all episodes seeing the
SPX go on to new highs. Note carefully on the chart though that price momentum has been
fading during 2014, in keeping I think with the progressive phase out of the large QE program.
Not only that, but players have become more defensive in stock selection and have stayed cool
on smaller cap, more traditionally volatile issues. With QE over since the early autumn, the SPX
has been trading more toward low end of the trend range in recent months.

Now, I do not pretend to have special insight on how well the market will perform in 2015.
Monetary liquidity growth is going to continue to decelerate through the year and excess
growth of liquidity relative to the needs of the real economy will likely continue to fade.
If the USD - Japan Yen relationship remains strong in favor of the dollar, there may be a
positive liquidity partial offset in the form of an expanding carry trade. As well, it might
come to pass that there will be a significant rotation out of bonds into stocks if the Fed opts
to push short rates up by 50 basis points or so as a further tightening trial.

I think players have bought the idea that some growth with low inflation and interest rates
gives them carte blanche to see how far they can push up the multiple. There is a large
degree of intoxication there. However, I also think the guys know they are playing with
fire in the game of extending the p/e multiple further. Just witness the fast, herd instinct
whipsaw action we have seen in recent months.

We can speculate happily on the potential for market return in the year ahead, but be sure to
recognize that  market risk has become sharply elevated as the US transitions more fully
away from powerful liquidity support at a time when investor confidence and enthusiasm are
running high.
--------------------------------------------------------------------------------------------------------------------
I have linked to a chart of the SPX which compares it to a 200 day m/a oscillator in green.
The chart shows a gradual deterioration of price momentum going back to the middle of
2013. This gradual downtrend in momentum is a bit unusual, but if it extends well into next
year, it would put the SPX on a more modest course relative to the 2011 - 2014 uptrend.

SPX vs. SPX relative to the 200 day m/a

Long Treasury Bond Yield

The long bond yield  has been in a steep downtrend since the early 1980s. When you roll in price
appreciation with interest earned (including of course the interest earned on coupon re-
investment), It has been one hell of a bull market. Noteworthy here is that there exists a five year
base under the yield downtrend at the 2.5 - 2.6 % area. The long T has approached this base
recently on a strong downtrend in yield from the outset of 2014.

Despite economic recovery in place since 2009, the yield has remained in a somewhat volatile
down trail primarily reflecting the deceleration of the inflation rate in the US since latter 2011,
and the Fed's policy of keeping short term interest rates near zero. Obviously, the large T-bond
purchases involved through the three QE programs have helped. TYX Weekly

We approach 2015 as follows. Inflation is still in a downtrend underscored by weak oil, sensitive
material and commodities prices. The Fed is maintaining its ZIRP on short rates for now, but
could elect to abandon ZIRP later in the year if the economy expands firmly and more dissention
flares up among members of the FOMC. The QE programs have ended although the Fed is still
committed to buying securities equal in value to those that run off.

With total financial system liquidity growth having rolled over on y/y % basis, it is reasonable
to assume the economy will lose significant growth momentum at some point soon, unless
confidence remains high and credit flows to the private sector move as needed. In that latter
case, the Fed will likely respond by aborting ZIRP and starting to raise the Fed funds rate.
That would be an important negative for the bond market as it would signal that the Fed
was committing to normalizing policy. The market may seek to cross this bridge ahead of the
Fed as it did in 2013, but we should also gauge carefully how the economy does on its new
liquidity deceleration diet.

If you click again on the chart link, I would point out that the T-bond yield has moved down a little
fast relative to its 40 wk m/a. This is a sign of an "overbought" market as is the  28% decline in
52 wk momentum as seen in the top panel. Wherever the yield goes through next year, it
has had a run that may be too good in the short term

Oil Price

The free fall in the oil price over H2 has created hundreds of experts on the future of its
price. The many forecasts for 2015 range from $20 - 85 bl. so I do not know how useful
all this newly minted expert testimony is since it covers most of the waterfront. What I do
know is that the closing weeks of the year is a time for brief seasonal strength in the price.
My argument has been that a failure to see either a stabilization in price or a rally as the
year draws to a close might spell further significant downside as 2015 unfolds.

My view has been that the best place to be regarding the oil price is on the sidelines. The minor
price bounce this week has hardly been imposing and, another weak seasonal round is ahead
for the Jan. - Feb. period as refineries gauge what might be desirable gasoline blends for
the driving season to come in the spring. WTIC crude can easily drop another $15 bl. during
this layover. Moreover, it may be Jan. '15 at the earliest when the current rapid downtrend
line is tested. Since the oil price has a way of trending up or down for extended periods,
it does not pay to try to catch tops or bottoms but does pay to look for trend reversals instead.

WTIC Daily

SPX Daily -- The Thundering Herd

On Tues. 12/15 (scroll down), I mentioned the SPX had become oversold enough to attract
long side interest, and we sure got it. SPX Daily

The action since mid - Sep. largely features HERD behavior with rapid downs and ups. Nearly
mindless players appear to be driving the market in the short run. I can understand the increased
volatility up to a point. Folks know it is an expensive market with large downside if the
fundamentals go wrong. And, they know that moving heavily into cash which offers negative
real returns is not a place they want to be for long if the market starts up again. For many years
I would tell people that the stock market was a serious business but one not to be taken too
seriously. And now, as I glide toward life's Hawaii room, I am starting to look at the stock market
as not being a serious business but one that should be taken very seriously if you have money
invested. Let us hope this is the storm before the calm.

Monetary Policy

By post WW 2 standards, the Fed surely should have raised the FFR% today and abandoned
its ZIRP. By these standards, the Fed is now engaging in heavy handed interest rate suppression.
So, what gives? Interestingly, The Fed's data on production capacity growth shows that it is
on an accelerating path, reaching 3.1% yr/yr in Nov. That represents the strongest reading of
capacity expansion since 2001, and suggests to the FOMC that the economy can tolerate
continued moderate production growth without running a high risk of overheating. And, I
think They are figuring that by keeping the ZIRP in place, additional time can be bought to
allow more slack to be wrung out of the labor market so that there is eventually stronger
full - time employment and, perhaps, some upward pressure on wage rates.

Industrial output rose a strong 5.2% yr/yr through Nov. It may also be that the Fed suspects
that this pace of growth is unsustainable especially now that it has allowed the QE program
to expire. The Fed does not want to have to come back with another QE maneuver and by
allowing short rates to hover at the zero bound level for a longer period of time, it can buy
some more insurance to extend the economic expansion. We all need to keep in mind that
we live in a highly leveraged world, and with low inflation yet still decelerating, central
banks would like dearly to avoid having the deflation wolf come to the door.

Finally, the Fed may wish to tone down the rise in the value of the US $. If keeping the
ZIRP in place for awhile will help retard the dollar's progress, well that may be ok, too
as The Fed and the Treasury know full well that foreign issuance of US $ denominated debt
has proliferated in recent years.

SPX -- Daily

The fast correction in the SPX from Sep. into mid - Oct. ended with a spike bottom and a
quick, triumphant rally to new highs. The argument here has been that spike bottoms are
frequently tested and that the market has been overbought since mid - Nov. To compound it,
the insouciant "buy the dip" crowd tried hard for a few weeks to push the market higher even
though it was already in a significant overbought condition. The hope here was to cruise
through the ending days of 2014 on an upswing with a combo Santa Claus and Sugar Plum
Fairy rally and to leave whatever worries to be sorted out early next year.

However, it only took a very brief period without good positive momentum for another
pullback to develop and send the market into another sharp short term downtrend. The SPX
is now mildly oversold and should begin to attract long side interest soon. However, even
if the SPX were to begin rallying again here in the next few days, it would put the trend off the
spike Oct. low on a very high trajectory which would likely not sustain before the market
would face more remedial action. SPX Daily

Financial System Liquidity

Private sector liquidity growth has been averaging around 5.5% yr/yr recently. This growth has
been sufficient to fund the real economy, especially given the low rate of inflation. Total
sector liquidity growth to include the Fed's balance sheet was up 7.5% yr/yr through Nov.
Funding requirements for the stock and bond markets continue to be supported by the excess
liquidity provided by the Fed. But note that the Fed's balance sheet is no longer growing and that
total financial sector liquidity expansion measured yr/yr is falling steadily and appreciably. The
Fed is thus tightening monetary policy with the tapering and now expiration of QE 3.

Paced by 10 % growth of business loans, the banking system's total loan book continues to
expand. However, system liquidity remains strong as the banks have been able to grow the
loan book as well as add to short term Treasury positions. My short term credit / supply
pressure gauge is firming up in favor of demand. The gauge is a mild +5.0 but has increased
sharply since late 2013, a fact that will not be lost on the rate hawks at the Fed.

My markets cash reserve indicator has reversed course since mid - 2014 and is now rising.
The action is mild so far, but it signals a bit more portfolio manager caution on equities in
recent months.

Shanghai Quickie

When folks love the Shanghai composite, they really love it. The recent vertical move up is
right in there with the bubble inflation starting in late 2006 and the high speed run - up
starting in late 2009 when the big credit stimulus package was announced. Shanghai Daily

The RSI has topped 90 in the recent skyward move and that by the Shanghai's gaudy standards
is an overbought of consequence. Note as well that the index is now testing longer term price
resistance in the 3000 - 3200 range.

Stock Market -- Short term

Fundamentals
The SPX is up 12.3% for the year through Dec.5. Most US portfolios have underperformed this
benchmark by a significant margin. Charitably, the average portfolio is up about 3.5 - 4.0% for
the same period. The broad economy has been comparatively strong this year. Business pricing
power has not been strong, however, with sharp weakness evident for the oil patch and a range
of commodities producers. In addition, a stronger dollar may have attracted some offshore
money into the US, but it is penalizing the eps of a number of multinationals via translation
penalties, and it concerns some holders of small cap domestic shares who know that a stronger
dollar can attract foreign competition in previously more secure markets. Finally, the expiration
of QE 3 has led to a rotation in favor of large cap established companies and away from the
shares of smaller companies where volatility is higher.

It is also interesting to note that the SP 500 has been matched in performance this year by the
long Treasury bond. This reflects both risk aversion from the end of QE 3 as well as the
continuation of low inflation and short rates at the zero bound level.

Check out the relative performance of the SPX against The Russell 2000, the Value Line
1700+ issue equal weighted index and the Long Treas. SPX Weekly

Favorable monthly data for new orders, employment, auto sales etc. have helped the market
recover from the recent Oct. lows. Despite the sparkle of the monthly data, the weekly
forward looking indicators have been trending down since early Aug. and suggest that an
economic slowdown may not be far off.

Technical
As pointed out in a note on Nov. 13, the SPX is overbought. Since, it has soldiered on to hold
that overbought. SPX Daily  Players have been reluctant to leave the party for the big cap stocks
in hopes that they will be rewarded with a nice Santa rally as the year winds up.

Oil Price

Technical
WTI crude broke a nice five year uptrend featuring an $18 bl. price range in Jun. A fast and
deep downside breakaway has taken place since which knocked out supports at $80 and $70
and which currently leaves the market a little above long term support running back to 1999
and which now stands at $60 bl. The current speedy bear market is typical of a substantial
oil price decline and, in the modern era, such declines usually do not reverse quickly with
fast carry to new highs.

A break in long term support below $60 certainly cannot be discounted. If this occurs and
the market extends trading below the long term support line, it would raise the question of
whether there is a new ball game afoot for industry fortunes.

The market is deeply oversold. With WTI crude now trading at more than a 30% discount to
its 40 wk m/a, it will have the attention of short term traders looking for a positive bounce.
Note also the hefty oversolds now being registered by RSI and MACD. $WTIC Weekly

The oil price tends to trend strongly up or down. Thus, when a reversal of trend arrives,
trading it can be done with surprisingly little risk over the intermediate term. In short, it
is not worth the effort to try and catch tops or bottoms but is worth the effort to trade
when there is evidence of a trend reversal.

The oil price does tend to enjoy a seasonal bounce which begins in mid - Dec. and whch
runs into early Jan. Continuation of the current strong downtrend right through Dec. would
veer toward the ominous.

Wealth & Liquidity Transfer
Excess production is now a relatively modest 500K Bd. However, with fast rising US output
and modest demand growth, the oil gurus have the rate of excess global output rising to 1.5
million Bd. by year's end 2015. It is this longer range view of supply / demand that has the
market so worried. Should oversupply widen out as many now expect, there could well be
a huge wealth and liquidity transfer of up to 1.3 $trillion from net producers of oil to net
consumers over the next year. Such a grand transfer would lead to some major changes in
fortune for a range of countries on either side  of the production / consumption divide, and
might spur unrest and geopolitical bad behavior among countries least able to lose the petro -
dollars. As for oil companies, remember that the lever on the way up is the screw on the way
down.

Strategy
When you reach my age of 75, you will find you have to obtain a Papal Dispensation to short
markets. So, any interest I have in oil would be on the long side. On this issue, I plan to
see if still large oil futures positions by financial speculators need to be wrung out and to wait
for indications of a trend reversal.


  

SPX Monthly -- November, 2014

Fundamentals
Bull market in place since early 2009 remains in place. With the termination of QE, the easy
money portion of the bull is over. Profile is now moderate return for the assumption of much
higher risk. Liquidity cycle still strong at present, but progressive deceleration in growth of
liquidity measured yr/yr % suggests a moderation of business sales and profits growth in
2015 and early 2016. History makes clear that the cessation of large QE programs can work to
destabilize the economy unless consumer / business / banking confidence remain high and
private sector liquidity growth progresses at a moderate pace. Capital resources including
physical capacity, underutilized labor and banking system liquidity remain ample enough to
support moderate economic expansion through 2016. Inflation potential is modest so there
is no visible need for the Fed to raise short term rates enough to curb economic overheating.

Valuation
The market's p/e ratio stands at 17.5 x likely 2014 net per share. there has been a sharp
elevation in the p/e since 2011 reflecting a strong deceleration of inflation, the major QE
program and rising investor confidence in  the modest growth / low inflation story. Some
players remain convinced the Fed will re-institute some form of QE if the economy falters in
the months ahead.

I have the SPX  valued at a p/e of 17x based upon an assumed longer range earnings plowback
ratio of 60% (Currently, the breakdown is dividend payout 34%, plowback 66%).

Players must now pay a premium p/e on cyclically elevated earnings to be  long in the market.
The p/e on long term trend earnings of  $90 per SPX share is 23x. It is a very expensive
market on this basis.

Technical
The SPX is quite extended on the super long term channel as well as that of the current bull
market. Long term measures of RSI, MACD and price momentum are all at very elevated
levels. A substantial long term overbought happens to dovetail with a rich market on
fundamental grounds. SPX Monthly