Oil Price

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


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

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

Long Treasury Bond

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

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

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

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

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

SPX -- Daily

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

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

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

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

Monetary Policy

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

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

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

SPX -- Weekly

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

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

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

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


 

Stock Market -- Longer Term Issues #2

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

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

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

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

Stock Market Sentiment

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

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

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

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

SPX -- Monthly

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

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

Oil Price

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

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

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

Liquidity Cycle

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

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

SPX -- Weekly

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

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

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

Thoughts On 2016 National Election #2

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

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

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

Better Lucky Than Smart

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

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

SPX -- Daily (2152)

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

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

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

Gold, Silver -- Overbought On Record Speculative Interest

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

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

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

SPX -- Weekly

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

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

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

Economy, SPX, Long Treasury

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

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

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

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

SPX Daily -- Setting The Stage Anew

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

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

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

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

Gold -- Trading Up On Safe Haven Merits Now

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

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

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

SPX -- Weekly

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

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

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

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

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

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

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