Stock Market

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

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

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

Oil Market / Price

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

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

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

WTIC Weekly

SPX -- Daily

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

Monetary Policy

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

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

Long Treasury Price (TLT)

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

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

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

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

SPX -- Weekly

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

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

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

SPX -- Daily

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

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

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

Gold Price

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

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

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

Stock Market

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

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

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

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

Oil Price

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


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

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

Long Treasury Bond

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

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

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

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

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

SPX -- Daily

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

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

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

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

Monetary Policy

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

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

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

SPX -- Weekly

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

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

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

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


 

Stock Market -- Longer Term Issues #2

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

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

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

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

Stock Market Sentiment

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

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

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

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

SPX -- Monthly

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

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

Oil Price

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

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

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

Liquidity Cycle

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

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

SPX -- Weekly

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

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

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