Stock Market -- More Amber Lights

As the SPX continues to surpass generational overbought records, I have a couple of more
signals to keep in mind. The SPX is now trading at a 13.4% premium to its 40 wk. moving
average. This is not a record, but history shows that when the market exceeds its 40 wk. m/a
by more than 10%, the odds are only about 1in 4 that the market will make good further progress
over the next six months or so. This signal does not imply a bear market will be coming along,
but a correction of substance is certainly not out of the question. Also, with a powerful run-up
in place, the intermediate and longer term price momentum indicators (ROC% below) are
getting extended. They also portend but do not fore-ordain a discontinuation of momentum
uptrends ahead.  SPX Weekly

The SPX has also turned parabolic in this powerful rally. It has not and need not complete
its move, but for a long term veteran of the markets, such levitation is absolutely fascinating.
I have done markets bubble measurement over the years, and it is very hard to spot one in the
early stages. The trajectory up for the SPX is a bubble trajectory, but the SPX would have to
reach 3300 this year and, perhaps, 4100 in 2019 to qualify as a fully blown market bubble.
Bubble talk does not scare many players anymore because of the idea of how much money can
be made during the flight higher. Moreover, money managers can lose accounts quickly if
they do not play the bubble. That's called career risk, and it surfaced broadly in 2000. It would
be odd indeed to have a market bubble so soon after the 1996 - 2000 event, but these are
loopy times for the US.

If the market takes a holiday for a couple of weeks just ahead, but then resumes a its strong
trend higher, central bankers should start to feel the heat to tamp down the advance. Greenspan
warned about the last bubble in late 1996, then quieted down and wound up as a drum major
leading it higher.

Finally, do not forget The Donald. He has fucked up more than party with his peculiar
obsessions.

_____________________________________________________________________________

US Dollar

I have been bullish on the dollar since the end of the deep recession of 2008-9. The long term view
was that the dollar could rise from the deeply depressed low 70s level back then to the 100 level
by 2020. I did not posit faster economic growth than the world could muster, but that the US
balance of trade would gradually improve reflecting increasing fuel efficiency, rising domestic
hydrocarbon production and a continued slowing of real consumer spending growth on the basis
of less favorable demographics. The rise in the dollar up to the 105 level by the end of 2016
represented a considerable overshoot of my projection. $USD Daily

Slow global economic growth in the intervening years led to a contraction of global trade and
favored the dollar by too large a margin. The sharp decline in the value of the dollar since the end
of 2016 reflects stronger global economic performance, stronger trade, and some deterioration of
the US trade balance. In addition, the dollar was heavily overbought by the end of 2016.

The chart reveals that the dollar sits well above longer term technical support, and it is tempting
to extend the dollar's downtrend line significantly further in the months ahead. Since the end of
fixed exchange rates way back when in the 1970s, I have often been been surprised by the strong
volatility of the dollar and the other major currencies, so far be it from me to argue that the
dollar is about to bottom out.

In my view, the dollar has dropped into a  reasonable area just below the 90 level, and with export
sales rising at a reasonable rate, I am reluctant to become too bearish now.

______________________________________________________________________________



 

Stock Market -- First Greater Fools Arrive

The bull party has become a little more crowded with the arrival of the first greater fools. Among
the pundits in this crowd are those who proclaim that there is large sideline money that has yet
to jump in but is now doing so. The story goes that even after eight years of a rising market there is
a big crowd who are suddenly afraid they going to miss a huge run-up. When this kind of thinking
becomes mainstream as it last did over 1997 - 2000, you might as well put the fundamentals down
into your desk drawer. In fairness though, the market is hardly beyond rational argument yet, and
the recent trajectory of the SPX is still too mild to suggest a genuine bubble may be forming. It is
still just a burst of enthusiasm that has brought the market to an overbought that has not been seen
in over a generation. But, with money starting to flow into weaker, less experienced hands, volatility
could start to increase.

SPX Weekly

Stock Market

As we wheel into the new year, we start off with a fabulously overbought market and one which
is also mildly overextended on a very long term basis. My most liberal valuation measure has fair
value for 2018 at SPX 2610 based on a p/e ratio of 18x and eps of $145. On this measure, the
SPX is already discounting an extension of the rising earnings trend well into 2019. I fully expect
a nasty and deep correction at some point over the next two years, although I cannot make a
credible case for such as of now, as I have many more questions about the environment ahead than
answers.

My weekly cyclical fundamental market indicator is partly forward looking and partly coincident.
It rose very sharply over most of 2016 but advanced only mildly last year. I watch it in conjunction
with the PMI diffusion index for manufacturing. The PMI rose sharply from the 50 level in mid-
2016 to the very strong 60 area by late last year. I would point out that a 60 mfg. reading has only
been reached eight times since 1985 and rarely stays there for long. So there could be a loss of
economic growth momentum over the first half of 2018. If so, it could have a negative impact
on stock market momentum. On the positive side, my inflation thrust measures have turned higher,
but are up only rather modestly. Thus, the 18x p/e is not immediately imperiled on the inflation
front.

Faster economic growth last year has reduced excess monetary liquidity in the system down to
zero. Normally, that is a warning sign, but so far, foreign inflows to US stocks have been a nicely
positive offset (It should be noted that US market cyclical tops often coincide with surges of
stock buying from abroad).

Short term interest rates are widely expected to increase by 100 basis points over the next 12 - 15
months, but that need not be a problem unless the Fed signals an extended continuation of
monetary tightening.

Interestingly, the Fed has been dragging its feet on the much heralded quantitative tightening
program and this has helped both stocks and bonds. We await whether They will turn more
aggressive this year and how the markets will react. Ms. Yellen is leaving the heavy lifting
to the new guy.

Finally, we have The Donald himself. He could behave very badly if special counsel Mueller
closes in on him of if the stock market and the economy do not treat him well.

Have a good new year and Godspeed.

SPX Weekly

Stock Market Sentiment -- Quickie

When the equities only put / call ratio reaches a low level, it reveals strong bullish sentiment among
traders, and, as such may serve as a contrarian warning. The chart link below shows how the shorter
term p / c ratio since early 2016 has been in a persistent downtrend as the market has trended
sharply higher. Traders were way too bearish late in 2015 and early in 2016, and now have become
very nearly too bullish. This, as traders have positioned for a hoped for year end 'Santa' rally.

$CPCE Weekly

Long Treasury Bond

The long T-bond will be very interesting to watch as 2018 unfolds. With inflation running down
around 2%, the bond has given up almost all of its long run 300 basis point premium to average
of the inflation rate. Bond investors have also remained skeptical that US real economic growth
will accelerate markedly enough to create sufficient pressure on extant economic slack to push
the inflation rate above the 2% average for any appreciable period of time.

The long guy has moved up from its all time low yield of 2.1% to as high as 3.2% since 2016,
before settling down to the 2.8+% level recently. Doubtless, rising short rates over the past 12-15
months have exerted upward pressure on yields, but the rise in the long bond yield % has been
very stubborn. My bond yield directional indicator has pointed to higher yield levels but it too
has cooled off recently as US production growth has remained modest and sensitive materials
prices have flattened out after rising appreciably from early 2016 through early 2017.

So far, the bond players have not grown apprehensive that the Trump / GOP tax cut plan is going
to do much to push up either growth or inflation. Moreover, there is as yet little worry that the
combination of Fed quantitative tightening (selling Treasuries and agencies) and a larger budget
deficit resulting from the tax cut plan will create sufficient supply to put extra premium in the
bond yield. Plainly the bond market is playing like they are from Missouri: Show Us!

Long Treasury Yield %

Short Term Interest Rates

Well, I have dusted off the short rates file now that the Fed has started moving off the ZIRP
policy. Since the economic recovery began in 2009, the inflation rate has averaged about 2%
per year. My super long term short rate model suggests that the 91day T-bill should have
averaged about 2 - 2.5% over this interval. Obviously the Fed, deeply concerned about nursing
the Us economy back to life and on to a more stable footing, allowed the 'Bill' yield, or risk-
free rate, to hover near zero over most of this period. The T-bill has risen up to around 1.3%
recently, so we remain in an easy money mode when compared to inflation. You can see the
same thing by comparing the low bill yield to total business sales of around 6% measured y/y.
It is interesting to note that my cyclical rate direction model only signaled that short rates should
be rising only twice over the entire 2009 - 17 period. the first time was as 2014 progressed and second time was as 2017 unfolded. It has even been a stretch this year as business shorter term
credit demand has been increasing only modestly. The long term approaches I use show that
the Fed has indeed been very easy with money but not recklessly so.

Investor expectations for the direction of short rates next year and in 2019 reveal modest projections
of higher short rates and are based on the assumption the Fed will continue to move to restore
normality to the interest rate structure on a gradual basis. It is wise to expect short rates to keep
on an upward track through 2019 provided the economy continues to expand and the inflation rates
strengthens further .

Since there is light pressure when one compares short term credit demand against the supply of
loanable funds, economic momentum and the inflation trend will be the key fundamentals going
forward. Naturally, as Mr. Powell eases into his role as the new Fed chair, markets players will
take careful note of whether changes in the Fed's approach evolve.

3M T-bill Yield

Bitcoin Goes Parabolic

Bitcoin is the most prominent of the growing list of crypto-currencies. When I first encountered
it in 2008, its foundations were shrouded in mystery, but I think it was intended as an alternative
to fiat currency which had features that suggested that, unlike fiat currency, it was designed as
an inflation hedge which could maintain its value. As such, it should hold its value over
time when adjusted for the inflation rate. With inflation low and relatively stable in recent years,
the original concept suggested that Bitcoin's price should appreciate rather modestly. However,
it has become a plaything for wealthy individual traders and investors. Now that it has become
a high flyer, Wall Street has taken an interest and and a futures market is about to be rolled out.

It may well be, that over the long term, crypto-currency may occupy a spot along with PMs
such as gold in the inflation hedge play category. At the moment, however, it is in a parabolic
price formation and that kind of price curve rarely works out for those who come in long as
the move completes. It is tough to measure parabolic price action with accuracy, but the
Bitcoin curve looks like it may be in a terminal phase, at least for the short run.  CBTC Weekly

SPX In Longer Term Perspective

Looking back nearly 25 years, it has been an impressive period for the SPX. Net per share has
compounded at 6.6% annually which is a bit above the very long term average. However, the
SPX itself has grown at 7.8% as the p/e ratio has tilted higher in recent years, reflecting not
only low interest rates and inflation, but high confidence the longer run future will bring more
attractive performance.

The market is trading above the upper band of longer term ranges starting in the early 1930s,
again reflecting rising earnings and elevated p/e ratios. Noteworthy also is that earnings are
not yet enough extended to signify a top in cyclical economic performance.

The accompanying SPX chart makes clear the dramatic recent power of the market. SPX Monthly
Measures of longer term price momentum are running as strong as they have in over a quarter of
a century and the near term reveals no indications of decay as of yet.

When the market topped the previous historic highs during 2013, it signaled the onset of a new
bull market and not just a quantum cyclical bounce off the 2009 cyclical low. However, from
a practical technical point of view, the evidence would suggest the SPX should not do much
better than at present in the near term without some degree of negative price adjustment. The
'now' should be interesting because the boyz are hoping for a nice Santa Claus rally to wrap up
the year.                                                                                                                                                                     

Continuing Bet Against Inflation

My longer term inflation pressure gauge strongly suggests some acceleration of inflation
pressure over 2018 - 19. However, the shorter term inflation pressure measure, although
hitting a low this year, has advanced only meekly despite a nearly global advance in economic
momentum. The broad CRB commodities index is up but slightly over levels seen in mid-2016.
Even the industrial commodities composites have leveled off after advancing earlier this year.
I think it is true that despite faster economic growth, there is still significant excess plant capacity
in the world, but there are a couple of other factors worth remembering. One major one has been
the very substantial over-investment in inventories in evidence for at least the past five years. I
believe excess stocks are being worked off and that as near term supply comes into better
balance with demand, commodity prices should rise a bit faster. The other big change we have
seen since the early part of this new century has been the 'financialization' of materials markets
through rapid growth of futures trading and the development of products that both traders and
investors can access without having to deal with the actual physical volumes themselves.After
the major global economic downturn of 2007- 09, materials markets have have lost favor to
the financials reflecting the continuing imbalance between materials supply / demand.

However as the slack comes out of the materials markets and inventory overhangs are cleared,
there may well be a shift in trader preferences from financials back toward materials, one which
could be much stronger than the actual improvement of materials demand vs. supply.

With prospects for faster inflation still rather humble short term, the financial markets still
hold sway. Consider the exceptional tightening of the yield curve: 30y Treas% - 2y%

The Stock Market -- Long Term

I am projecting the SPX to reach the 3550 level by 2025. This projection is for doggy growth of
about 4.2% per annum and includes a substantial price retreat and subsequent recovery around
2019 - 2020. What's worse is that I have ginned up the SPX ' earnings growth rate slightly to
account for faster foreign sales and profits growth and also for improved inventory management
by US companies.Despite the availability of highly sophisticated supply management  tools, the management of inventories by business has been too speculative over the last seven odd years.
I am also looking for modest appreciation of business pricing power as the world slowly works
off still sizable production capacity. The growth of monetary liquidity will continue to taper
down as central banks work to regain reasonable balance between the still excessive supply  of
liquidity and genuine economic demand. This will mean somewhat higher interest rates over the long run and considerably more market volatility as the days of spoon feeding the global economy with
dollops of liquidity wane. In sum, I envision a more subdued continuation of the bull market but
one with an expanded 'normal' price range.

If I was a younger guy with a couple of extra bucks, I would be looking at investment in reasonably
valued smaller capitalization companies in both the US and foreign markets. I would only trade
the US market overall after periods of substantial price weakness and, most of all, I would be
looking to invest money privately here at home.

The following chart shows the current very elevated SPX with a horizontal line at 2200 which
is the level that would provide closer to a 10% annual total return out to the projected level of
3550 in 2025. SPX Weekly

Longer Term -- Monetary Policy

It is gospel among central bankers that provision of excessive money growth over time will
eventually lead to price inflation which will tend to accelerate to levels that are unacceptable to
the execution of sound monetary policy. The period of major quantitative easing of policy in the
wake of the Great Depression and lasting until the end of WW2 swelled the monetary base hugely
and was never corrected. There were a number of factors that contributed the dramatic inflation
of the 1968 - 82 period and it can be argued that the swelling of the monetary base in years prior
probably contributed to it. Looking out longer term, today's central bankers are concerned that the
major QE programs of recent years, if not corrected in some form could provide the raw material
for a new round of major inflation at some point down the road. The thinking here is that even if
there is no immediate risk, inflation could well up again even if it is ten years out or longer.

The mammoth excess reserves that now  sit in the world's major banking systems are of major
long term concern to the central banks. Programs to reduce the size of central bank balance sheets
directly or hold them in check by paying competitive interest rates on these reserves are two
methods under review. Suffice it to say that plans can be expected to be developed which will
provide far less proportionate liquidity than investors and traders have become accustomed to
over most of the last decade. Since such tightening of policies have not been tried before on a
major scale, there are elements of sizable risk that may only become apparent as these programs
unfold.

The Fed currently plans to experiment with reducing the size of its balance sheet in the months
ahead in combination with a program of continuing to gradually increase the level of short term
interest rates as the cycle of the economic expansion cycle plays out.

With the economic depression of 2008, the world entered a pro-deflationary environment because
the preceding global economic expansion and the initial bounce of economies after the 2008-2009
downturn resulted in the development of large excess global productive capacity. The issue
of low operating rates is next on this exploration of the long term.

The Long Term -- Overview

This post begins a series of notes on the long term outlook for the capital markets and the
economy. It is based on a half century of analytic work, hopefully informed conjecture, and
of course, sprinkles of pure imagination.

I think that by 2025 - 2027, the stock market and the global economy will fall into serious
trouble. I foresee a credit crunch that bring the stock market and an overheated economy into
steep downturns. I am looking toward China to have large scale economic and financial blow-
outs that take the US and the rest of the world down with it. I also am projecting an end to a
longer term bull market in US stocks to come to a an end which will see highs that are not
surpassed for a good several years. As well I am, projecting the broad financial environment
to become increasingly volatile by 2020 if not a little sooner.

This view presumes that inflationary pressures will gradually increase going forward and bring
about a long, long overdue capital expansion cycle which will add to the world's production
capacity and thus set off central bank tightening of the credit reins.

Through this all, my deepest concern would be for China where the odds favor up and coming
technocrats who will decide to bring President Xi's expanding political power and reach to an
end. This is projected to be an introspective and deeply unsettling period.

Although I do foresee the US bull market in stocks coming to an end until 2025, I suspect an
overvalued market to have a serious decline over 2019 - 2020 as the economy shifts away from
nominal inflation and super low interest rates up toward more "normal" levels.
______________________________________________________________________________
Note On The Near Term
The SPX is getting a touch pricey...Note as well that the intermediate term stochastic (bottom
panel) rarely goes through a calendar year without heading down toward the 20 level.
SPX Weekly

Broad Stock Market (Value Line Arithmetic)

Cyclical Bull market continues and rose to new high this week.

Spurs for new up leg since early 2016: Potential for faster economic growth as major business
inventory cycle unwound....Increase in business pricing power and higher profit margin...Promise
of large tax cut program encompassing both individuals and business via Trump...Continuation
of very low and negative short term interest rates.

Looking Ahead
Momentum of real economic growth is at or near peak with slower growth ahead...Pricing power
has been disappointing this year but may improve slightly....Tax cut program could boost corporate
profits by an extra 10% over 2018 / 2019....Passing of tax cut program in full hardly assured....Fed
plans another hike to short rates and to begin shrinking excess liquidity....Private sector funding of
economy is now merely adequate with no excess of liquidity in evidence.

Valuation shows a fully valued market with little scope to tolerate an unexpected surge of inflation
pressure or more sustained rise of short term interest rates.

Fundamental conclusion : bull market with moderate return / high risk profile because of
developing tightening of liquidity.

VLE Weekly Chart

Chart shows overbought market for intermediate term...Bottom panel shows that mid and smaller
cap. stocks are starting to outperform on expectation  that tax cut program will pass muster.

Trump Plan To Loot The Treasury

The Donald's tax cut plan offers a bonanza in cash for the wealthy and for business. And the
Congress has put itself up for sale as well. Ostensibly, to help defray the costs of the large tax
breaks ahead, tax loopholes will have to be closed. The lobbyists will be there with campaign
cash, sports tickets, girls and even job offers for the future with the private sector. As of this
moment, all the deficit hawks around when Obama was president appear to be on holiday.
There will be many debates and fights over these issues. All of them will be stale. After all,
the issue  of laissez-faire vs. the welfare state has been around for nearly 150 years here in the
US. There brawls will be especially nasty if the Ryan wing of the House starts talking up
entitlement spending cuts to help contain the budget deficit.

When it comes to the markets, there will be extra spin and bullshit thrown in with the strategy
pieces yet to come on stocks, bonds and gold. I leave it all to the rest my brethren to regale
you with their stories. 

Stock Market

I have followed the stock market since the late 1960s. I have always been a monetary liquidity guy
who like to buy when the Fed fosters a tail wind for the economy and the stock market through
providing liquidity to the system and reducing interest rates.

Finding market low points when the Fed has your back with 'easy money' has been a top priority
for me because these periods are always low risk / high return intervals. I have always been much
less concerned with trying to call market tops when the Fed has turned restrictive and liquidity
is being squeezed because I usually opt to scale back positions as the head winds intensify.

The Fed is embarking on a historic mission now. It plans not only to raise interest rates gradually,
but to shrink its balance sheet and excess reserves in the banking system. The bulls will argue
monetary policy is still accomodative, but as time rolls along, the Fed will continue to reduce
its balance sheet substantially, and the head winds will only intensify.

I am content with SPX 2500, and at the tender age of 78, I am not well motivated to do the
careful and intense research to figure out when the market will get into trouble. There are lots
of interesting things to do that do not  require such strenuous work.

Here is a link to the monthly SPX. It is overbought longer term, but the important MACD
momentum indicator remains positive.  SPX

Long Treasury Bond Yield

The 35 year long bull market in quality bonds has been one of the greatest gifts to investors in all
history. For savvy market players, it has been like shooting fish in a barrel. Moreover, it may not
be dead yet. This is because the long term down trends in real economic growth, inflation, and the
full spectrum of investment grade interest rates have not reached decisive conclusions.The US will
likely need to experience another economic recession at some point in the years ahead before we
could be sure that deflation and zero short rates may have been banished. This is why many bond
players have not thrown in the towel despite historic lows in Treasury yields in 2016.

Since this is one of my final blog entries, it would be polite of me to offer long term guidance on
the potential for the economy in the future. But, to be truthful, I have thought for years that the
US economy had the potential to grow by 2.7% per annum based on work force growth and
productivity assumptions and, as it turns out, this view has been too optimistic. Businesses have
just been too cautious to make the long term capital commitments to assure a more productive labor
force in the wake of the huge expansion of productive capacity in the 1990s and more cautious
growth in final demand so far in this century. Even today, capacity utilization in the US is a sub-
par 77%. It could turn out that much of the excess capacity is by now uneconomic and that even
continued modest real growth will eventually trigger an unavoidable need for productivity
enhancing investment. Having been too optimistic about the economy, I leave it for actual events
to tell the story.

I have a link to the long Treasury yield for the past 5 years. In the chart you will spot a horizontal
line at 33 (3.3%). If the long bond yield  rises above that level over the next year and remains
"sticky" above 3%, that would constitute a break of the very long term down trend in yield for the
bond and would be a prima facie indication that the bull was finally winding up, but hardly a
conclusive one.   TYX Weekly

Gold Price

In the modern era, gold ownership has increased despite its extraordinary volatility. There are very
long term but hardly imposing correlations between the price of gold, accumulated  inflation, the
trend of financial liquidity and the all-in costs of producing an ounce of gold. The latter has risen
sharply over the years as it has become more difficult to find rich seams that are easy to extract.
As an asset class in the modern era, gold most often comes into favor as an inflation hedge play,
and its price can languish during extended periods of low inflation.

Gold has been advancing in volatile fashion since early 2016 on expectations of faster economic
growth  an accompanying cyclical acceleration of inflation. The global economy has been doing  better, but the underlying progress of inflation has been subdued as large excess inventories have
 had to be whittled down to size. Factory operating rates have been stable but suppressed
so that a range of materials prices have  not been swept upward in a fashion typical of a faster pace
of economic growth.

The US dollar has been weak this year as skepticism developed that low inflation would restrain
the Fed from raising short rates. Gold has reacted positively to the weaker dollar, perhaps on the
premise that dollar weakness is a harbinger of future inflation.  Gold Price (Weekly).

If the economy continues to progress and there is a quickening of business inventory accumulation,
inflation should mover higher on a cyclical basis and gold holders may profit more over time so
long as investors dot not quickly decide that the Fed will notstand by and tolerate more than a very
mild lifting of the inflation rate.

Longer term, we may need confirmation  that the global economy is transitioning away from being
deflation prone back to being inflation prone before gold becomes a sturdier holding. in the mean-
time do not loose sight of the fact that equities players may continue to prefer to rotate into gold
when the stock market gets shaky.

Monetary Policy-- FINAL POSTINGS AHEAD

Short Rates
The Fed again declined to raise the Fed Funds Rate (FFR%) today. Maybe by Dec. '17 they will put
25 basis points on. There is only modest inflation thrust now and hurricane damage will be a
temporary drag on the real economy. The Fed has also been watching the economy work off very
large excess inventories dating back a couple of years. This cycle will have to run its course before
commercial loan demand finally begins to re-accelerate. Businesses are being a bit more circumspect
with their inventory policies so far this year.

Quantitative Tightening (QT)
The process of shrinking the Fed's balance sheet and the excess reserves in the banking system
 is scheduled to start in Oct. with $30 bil. monthly roll-offs and sales. The shrinking
process could accelerate to $50 billion month as early as some point next year. To get back to
"normal" the Fed will need to have about $2.5 tril. in securities on its balance sheet by late 2020.
If the Fed shrinks its balance sheet by $50 bil. a month, there will still be sizable excess banking
reserves in the system. After 2020, the Fed will have to get more careful with this QT program
so as not to leave the banking system short handed. This assumes that QT works in practice as
well as it does in theory. Risky business? Mais oui!

The Fed has presumably thoroughly studied the liquidity requirements of both the Treasury
and agency markets and has set parameters for when it may have to intervene short term in
the markets as well as whether there may be a sizable increase in daylight overdrafts. Theory
says things may operate smoothly, but in practice there may be spooky short term liquidity
squeezes. Will the markets begin to price in special squeeze risk premiums and could there
be disruptions to the derivatives markets? It may be wise to expect both in the early going. 

SPX Weekly -- Longer View

Fundamentals
In the initial economic recovery surge, US business rose to exceed 10% yr /yr. during 2011. Then
a slowdown hit which ran into late 2015. Volume growth slowed significantly and pricing power
went from 4-5% annually into negative territory. The stock market weathered this seriously
deficient performance because of the huge QE programs from the Fed and a dramatic increase in
earnings capitalization (p/e ratio). Over the course of 2015, the private sector took over from the
Fed and funded the economy. Business began to pick up sharply in early 2016 and the stock market
began a new cyclical leg up. Business sales recovered from negative momentum territory to
finish 2016 at around + 7.5% yr / yr. Very large excess inventories which dogged the economy
in recent years have been pared down sharply and earnings have recovered substantially. Sales
growth momentum, especially in retail, has slowed throughout 2017, but is at a respectable 5%
 5 % Ann. rate given low inflation.

My weekly cyclical economic indicators have been suppressed by recent hurricane damage,
but the trends through 2017 continue to suggest that further growth momentum
erosion is on tap for later this year and into 2018. At present, recently renewed broad strength in
the SPX shows that investors apparently have little concern.  SPX Weekly


The Fed still desires to "normalize" monetary policy via raising short rates further and also via
reducing the size of its balance sheet, perhaps on a systematic basis. We may be about to step
off into new territory from an historic basis. If and when the Fed proceeds on both fronts, it will
usher in era of quantitative liquidity tightening (QT). The banking system holds enormous
excess reserves from the QE programs, and it will be the surplus reserves that are cut. Even so,
if the Fed sells securities and allows others to run off, it will impact liquidity in the markets
negatively. As of today, there appears to be little concern in the markets.

Technical
The SPX continues to trend higher, but is approaching another intermediate term overbought on
RSI. Recent overboughts have only slowed down positive price momentum, but be assured some
traders are near to squeezing the sides of their chairs.