SPX Monthly And The Rule Of 20

Starting in the 1960s, capital asset pricing began to shift focus, tying prospective asset returns to
the levels of the risk free rate (91 day T-Bill yield) and the rate of inflation. In broad terms,
equity strategists started tying the rate of earnings capitalization (the market p/e ratio) to the Bill
yield and inflation, with the market p/e ratio set to vary inversely with the levels of short term
interest rates and of inflation. With some empirical foundation, strategists came up with the 'the
rule of 20' which lays out that the market p/e ratio = 20 - the inflation rate. Thus if underlying
inflation is 2%, the SPX should trade for around 18x net per share. There are different sorts of
issues and problems with the formulation, but it has retained significant popularity.

Using a long term trend line, SPX net should be around $135. out through mid - 2018 and the
market should trade around 2430 (18 x $135.). Under this method, the SPX is reasonable or
fairly valued. There is an issue that investors have not fully broached yet. How reasonable is it
to assume that SPX net per share will grow at 6.5% in the years ahead when the top line or sales
growth may struggle to reach 5% and companies have been squeezing cost structures for years
to boost profit margins? This is why a number of well seasoned  strategists are warning that in an
era of real growth below the long term average, investors must brace for lower returns.

For a good while this year, investors were not troubled because they saw the Trump / GOP nexus
pushing stimulus plans that would boost top line growth somewhat and lower the corporate
income tax. But Trump's troubles and a GOP that lacks the unity to push stimulus programs
through raises questions about whether SPX earning power will be strong enough to sustain
the 6.5% growth trend for the next several years.

Whatever your strategic approach to the market may be, the preceding three paragraphs offers
good insight into how the Big Money plays the game most of the time.

Attached is the SPX Monthly Chart. Pay careful attention to the continuing positive reading
of the monthly MACD indicator -- It does not whipsaw often.

Stock Market

The week before last, the boyz were hollering for a break above SPX 2400 as they feared having
to deal with a double top. And they got one! The market loves to punish the vocally demanding,
but not this time. Last week's advance keeps the post election rally alive, at least for the large cap
sector of the market. The trend up from the Nov. low remains sharp, but there remains little room
to avoid a break in the weeks ahead. The SPX remains moderately overbought on a momentum
basis. It was allowed last week that it could break above 2400 in the short term and there is still
a little bit of room to push it higher. However, the SPX remains heavily overbought looking out
3 - 6 months. SPX Weekly

The weekly cyclical fundamental directional indicator has been flat since the end of Jan. this year,
but it has improved nicely over the past couple weeks reflecting the remarkable performance of
the new jobless claims indicator which has dropped sharply to a 44 year low. Total civilian
employment is up only 1.0% y/y, but it is the jobless claims data that wags the dog here. I would
like to see more positive breadth among the weekly data, but initial claims has been a trader
favorite for years. Among the indicators, sensitive materials prices have turned weak since early
in the year. This development has been a nice positive for the bond market and it may also account
partly for investor preference for large cap stocks.

From a fundamental indicator perspective, the cyclical case was very strong for equities for most
of 2016, but has weakened appreciably since earlier in this year. the SPX is holding its uptrend
nicely in 2017, but without strong and comforting cyclical support.

SPX -- Weekly

My e-inbox is stuffed this week with indications of growing pundit / strategist impatience. This
is the first such suggestion in 2017, although it should not be a surprise given the continuing
flat market and a volatile week. I am not receiving  much bearish commentary, but rather
intimations that its high time for more upside or, maybe it will be wise to think about reducing
exposure.

My forward looking cyclical economic indicators have continued on the flat side since the end
of January, and, like the market, have not evidenced much in the way of volatility. The Congress
has taken up tax reform with emphasis on revenue take neutrality, and it is possible traders are
starting to miss Trump team leadership on a more stimulative set of guidelines with a clear focus
on significant deficit financing.

The weekly SPX chart shows the market is still working off a serious intermediate term over-
bought situation including now double top resistance at 2400. The market's range over the past
few months has been tight and there has not been the sort of sustained corrective action to
provoke thinking that a fresh buying opportunity might be at hand.  Similarly, there has not been
a test of the 40 wk. m/a since last autumn. I do not have a strong view on market direction near
term, but my discipline says not to trade extended overbought situations on the long side. The
chart does suggest there is upside through 2400 but maybe not very much.  SPX Weekly

SPX -- Daily

I plan to do a weekly update before the end of the weekend, so this piece is intended to focus
on the short term as revealed by the SPX Daily

There was a sharp and overdue dip this week as the Trump farrago captured The Street's focus
for a day, but news that the Congress is taking up a large tax reform program led to some cheer as
the week ended. The price gap alluded to a couple of weeks ago with the announcement of the
Trump tax proposal was closed by the sharp sell off on Wed. The partial rebound toward week's
end closed half the distance after the big downer on Wed. The market is still laboring under the
SPX double top at 2400, which marks clear short term resistance. There is short term support for
the SPX a little above the 2320 level.

The MACD looks a little nasty, but the SPX is now in relatively neutral territory.

Gold Price

In early 2016, economic fortune turned positive for the gold price in the form of faster economic
growth and accelerating inflation. It prompted a dramatic cyclical run for gold off its low in the
$1050 oz. area up to an unsustainable peak of $1375 in Aug. of last year when speculative froth
in the futures market bubbled up to dramatic new highs.  As expected then, the gold price corrected
to a deeper than expected low near $1125 late last year. That translated into a 7% price gain for the
2016, which seems appropriate to me, after all the dust settled. My shorter run economic and
inflation indicators have both lost substantial positive momentum so far this year, so the typically
volatile rally in gold in 2017 has been too strong on the inflation front in my view. Now there are
a bevy of potential geopolitical risk factors still ahead for 2017 ranging from North Korea on to
elections in Iran through to the Brexit saga, more elections in Europe and unsettled global
diplomacy reflecting The Donald in his role as wrecking ball of the old world order. On top,
with the US expected to be less dominant in the growth of the world economy this year, the
US dollar has been weakening so far in 2017 (which is fine by me).  So, gold has been getting
some support from both geopolitical uncertainty and a weaker USD, which has lost some haven
status.

With a correction underway in the USD, the gold price has some traditional appeal even though the
recent rally in anticipation of trouble after the French election has not materialized.  Gold Daily 

SPX -- Weekly

Fundamentals
Measured y/y, business sales and profits remain quite strong. Forward looking economic indicators
still suggest growth deceleration out ahead, but even this case is not closed yet. The future inflation
pressure gauge has weakened after a strong period of recovery starting in early 2016. Inflation may
also be set to moderate out ahead. Thus, the faster economic growth / inflation thesis which was
the bedrock for the strong up leg in the stock market since early 2016 hasn't yet collapsed, but has
dissipated considerably since earlier in the year. The market rally over the past couple of weeks
primarily reflects Trump talk of 'massive' tax cuts later in the year and hopes that he will keep
the infrastructure and offshore and dollar repatriation programs alive. If you are in it to win it
with The Donald, simply be prepared to continue to wade through the Trumpian horse shit that
will flow steadily our way.

Technical
Basically, the market remains overbought for the intermediate term with mild corrective action
quickly remediated in recent weeks. The market has now formed a 'secondary top'. This may
merely be incidental, but it could also be the prelude to something nastier as happened in mid-
2015. The SPX is also trading at the top of its 20 week Keltner channel, a development that
commands extra attention.  SPX Weekly

Trump And The Russians
There is plenty of smoke here, but how big the fire is is far from clear. In making FBI Director
Comey walk the plank this week, he has alienated the FBI to its core. Regardless of how the
investigation proceeds, figure that at some point in his tenure, the boys with the short hair cuts
and dark suits will take a large bite out of Trump's ass. Even a Trump built dyke will spring
serious leaks if it comes to that. 

Oil Price

Wicked isn't it? Confidence built strongly over the course of last year that the oil price had made a
decisive bear market low just under $27 bl. in Feb. 16. What followed was a powerful seasonal
rally into Oct. There was seasonal weakness afterward, but since Nov. of last year the market's
trading pattern has been somewhat off - kilter seasonally as debate has focused on whether
OPEC / Russia production cuts would allow rising demand to balance off supply such that, by
later this year, we could see crude rise to $60. By early 2017, speculative long positions in the
oil futures market had reached record levels. That intense speculation plus already dramatic yr/yr
% price momentum produced a dramatic overbought in the market as I suggested in posts earlier
this year. I argued that there would be at least a price "hiccup", and we have seen such over the
past couple of months after the normal or seasonal round of price strength over the Feb. - Apr.
failed to pan out. WTIC Daily

Indicators reveal a marked improvement in global economic demand over the past year. However,
the rate of progress may have peaked, at least temporarily. On the supply side of the oil equation,
US output recovery has exceeded earlier expectations, with the  NA rig count having more than
doubled since last May and capacity utilization at the well head now having risen to over 93%.
Even Libyan crude output is topping expectations. So, the story of supply / demand balance this
year is less sturdy now than it was. Moreover, speculative long positions in the oil future have
been sharply reduced, but are now in a gray area where further liquidation cannot be discounted
even if the pace of redress slackens. Seasonals have not been that important, but it should be noted
that Jun. ahead is normally a weak month.

The upshot here is the game of guessing on the direction of the oil price is now more tenuous
 in the near term. The technicals here are mixed. The oil price is in a volatile short term down-
trend and is behaving poorly against its 200 day m/a for the first time in quite a while. On
the plus side, the market is oversold and even though timing measured in days is not sure,
there is a rally out there before too long.

The VIX Volatilty Index

I make limited use of the VIX index. However, when the weekly index falls into the 10 -12 range,
there is a clear suggestion to expect volatility in the stock market to rise out ahead. This means
that it would be normal to expect some corrective action, but it certainly does not imply that it
will be major. Even so, the current nearly historically low VIX does suggest that when the market
moves into a more volatile period, it can certainly last a while and be a little spooky.  VIX Weekly

SPX -- Monthly

The SPX remains in a cyclical bull market and is experiencing its third leg up since the bottom in
early 2009. The third leg commenced in Feb. '16, and was confirmed during the past year by a
positive turn in the very important monthly MACD measure.  SPX Monthly

It is very difficult to judge how far and how high this leg may carry. There is sufficient capital
slack in the US economy to carry the market well into 2019 even though the labor market is getting
tighter. Also, there are plans to be debated in the Congress to cut taxes, repatriate foreign retained
earnings and develop a sizable infrastructure program. It seems at this point that the Trump admin.
would prefer to fund most of the contemplated tax cuts and increased spending on infrastructure
projects via substantially larger Treasury and agency funding. The size and funding of these
programs must pass muster in a Congress which richly embodies the deep political, economic and
social divisions in the US.

Since the first powerful surge of economic recovery which completed over 2010 - 2011, the pro-
gression of economic expansion has been slow (real growth) and low (modest inflation). The Fed
has choked off growth of basic liquidity since the end of 2014, and is now following a policy of
gradually raising short term interest rates. Headwinds have replaced powerful tailwinds on the
monetary front and the market has moved from a low risk / high return environment to one of
rising cyclical risk and less assured returns.

With both labor force and productivity growth running low, future business sales and earnings
growth potential are running well below long range experience, the stock market is reliant on
a continuation of low inflation and interest rates to remain competitive in the capital markets.

The stock market is once again running above the upper band of its price range starting from
the end of WW 2.These periods can extend for a few years, but downside price risk is rather
high even though a bear phase may not now be imminent.

Investors are so keenly interested in the Trump admin.'s stimulus programs because they forsee
accelerated economic and earnings growth coupled with probable moderate Fed tightening and
faster but not skyrocketing inflation that would combine to give them a shot at earning excess
returns for a few years. Absence of such programs seems to beckon dreary and risky times as
well as lousy bonuses for investment managers and rising career risk in a business that is not
short of capacity.

So, there could be some market downside if the Congress ties these stimulus outlines up in knots
and confounds all the equity investment mangers who are hoping for a new lease on life.

SPX -- Starry Night In Harrisburg

I'll get to the Harrisburg, PA bit in a minute, after some preamble. Back on Apr.14 (scroll down), I
suggested the SPX was nearing a flashpoint. The indicators were negative, but the market was
fast approaching a short term oversold. It hit a low point, and bounced a little last week, before
catching fire for the first two trading days this week.  Confidence was helped over the weekend
when part one of the French election went as expected, but remember as well that The Donald
announced last week that an outline of the tax cut / reform program was to be announced this week.
He "kited" the market yesterday with the announcement that a large cut in the corporate tax rate
could well be proposed, and the Treas. Sec'y added fuel to the fire by hinting that such a cut would
be financed by borrowing, with the resultant stronger growth to "pay for" the cut. This brings us
to the starry night in Harrisburg. In his first 100 days in office, Trump has produced a thin slice or
two above jack shit. This Saturday he holds a rally in Harrisburg, and hopes to cover very anemic
performance by touting his tax plan and bragging about how well the market has done since the
election. Maybe he will pull it off, maybe not.

As he tries to pull the market into his world, the short term economic indicators continue to suggest
that a flattish market is the best prospect. The rest of the week will be busy in DC. The boys will
need to sign off on keeping the gov. open; there will be more from Trump on tax cuts; and there will
be feedback on the tax plan and the wealth care er, health care plan from the Congress. As well, with
the nuclear submarine USS Michigan docking in South Korea to complement the USS Vinson
battle group now (presumably) in position in the Sea of Japan, it will be young Mr. Kim's chance
to pop off.

Attached is the SPX Daily chart. What is that old rule that price gaps are eventually closed?

SPX -- Weekly

Fundamentals
The stock market has been in a strong up leg since Feb. '16,  a move that brought it to a new all-time
high as Mar. of this year began. The weekly cyclical economic indicators turned positive around the
Feb. last year and powerful momentum for this indicator set appears to have provided the requisite
underpinning for the market's advance. The indicators are forward looking and it may be important
to note that this set has now been flat since Jan. of this year, suggesting economic momentum may
slow out ahead. In turn, the SPX, which hit an interim peak at the outset of Mar., has been in
moderate corrective mode since. The market hardly moves in lockstep with the indicators, but the
suggestion here is that, barring an upturn of the indicators, the SPX should continue on the flat
side. As a secondary factor at this point, inflation pressures have recently eased, and this may keep
the Fed from more aggressive tightening action over the near term. A less aggressive Fed is a
positive for stocks, but since the progress of the SPX over the past year has been fueled by expec-
tations of strengthening progress of business sales and earnings, there could be an adjustment
process for stocks to complete, especially since the development of new fiscal measures to
stimulate economic growth may be getting pushed further out in time as the Trump team figures
out how to work better with the Congress.

Technical
The SPX has been working off a substantial intermediate term overbought. There is nothing in
the weekly chart to suggest this process is about to end. Adjustment is already well underway
with the RSI and oscillator measures, but the important MACD measure has just turned negative.
Moreover, the SPX is still at a 4.6% premium to its 40 wk. m/a. The premium is contracting,
but it is still significant. There is no inevitable negative conclusion, but do not ignore the
evidence.  SPX Weekly

SPX Daily -- Crossroads Ahead

The SPX has been working off an intermediate term overbought. In the meantime, the daily chart
shows that corrective action is tilting toward a flashpoint.  SPX Daily

Based on closing prices, the SPX has been in a downtrend since the end of Feb. Notably, the 25
day m/a has rolled over and the SPX has failed to rally above it. The market is in a mild
oversold condition, and both RSI and MACD have declined near important testing points with the
30 day ROC now in mildly negative territory. Corrective action has been moderate so far,
but the shorter term indicators show the worst readings since the recent market upturn began in
Nov.

I have been wondering for weeks whether the Nov. rally would follow the other two which took
place since the market turned up back in 2/16, and ultimately finish up with a test of the 200 day
m/a. That would be compelling symmetry, but there is hardly enough logic in the market to make
it happen. Even so, it's heads up time from a technical point of view.

We roll into Easter weekend with tensions again running high on and around the Korean peninsula.
There is The Donald to contend with and new leadership in Seoul. The odds are that the US
command is telling the President to cool his jets and wait to see if his new best friend, President Xi
of China, has any magic to work that gets us all off the hook. Market players do not seem very
concerned, but always keep in mind that this particular area of the world is strewn with mis-
calculation through history.

I plan to post again on the weekly SPX chart by Sunday evening.

SPX Weekly -- Quickie

The SPX was knocked off the rally trend from Nov. and now has turned weak on the MACD
indicator.  SPX Weekly

The market has been working off a substantial intermediate term overbought and although there
has been some downward pressure in recent weeks, there has been no decisive break yet to shift
market player attitudes away from a bullish posture. As outlined in the 3/26 SPX Weekly (scroll
down), fundamentals suggest continuation of a flat market.

Gold Quickie

Tensions between the US and Russia helped the gold price this past week. Moreover, with Rex
Tillerson, US Sec'y of State and a Putin pal, scheduled to meet with Russian Bigs next Tues. in
Moscow, there could be additional  US / Russia diplomatic fallout ahead. Because the USD also
rallied this past week, the gold price might require more tensions to stay afloat in the short run.
The indecision in the market is captured by the fact that gold closed out the week just around its
40 wk m/a.  Gold Weekly

Gold (GLD) -- Weekly

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

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

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

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

SPX -- Weekly

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

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

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

Oil Price

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

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

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

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

SPX -- Weekly

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

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

 

Economic Growth Momentum, Stocks & Bonds

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

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

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

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

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

Stock Market Profile

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

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

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

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

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

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