Key Economic Factors For The Markets

The growth of monetary liquidity has been shrinking until recently. The shrinkage was severe
enough to force the US economy to rely on private sector funding to underwrite growth. Recently,
the Fed has backed away from its policy of strong liquidity tightening, which was adopted to
reduce the mammoth increase in the size of the Fed's balance sheet (Fed Credit) and the flip side
swelling of excess bank reserves. Fed Credit is still so large as to represent a major long term
inflation threat, but with the economy slowing down to a crawl, the Fed has decided to relent for
now. Liquidity growth is improving, but only mildly so, and is not yet nearly strong enough to
support more than a very mild resumption of economic and profits growth. Faster monetary
liquidity growth now seems inadequate to fund both improved economic growth and sustainable
rallies in the capital markets.

The Fed is clearly leaning toward reducing short term interest rates before too long, but take
note that Wall Street is particularly bad at guessing Fed intent. If the Fed moves to cut rates
in the weeks and months ahead, there could be an additional shot of liquidity to the system as
as the Fed moves to assure an orderly transition to a lower rate structure. In this event, stocks
could receive an additional mild positive jolt.

On the other parched palm, if the Fed opts to toss caution to the wind and run with a more
liberal policy, the US Dollar will sink in value and the long dormant commodities market will
likely perk up. The gold price would receive a nice boost while the bond market could weaken
sharply, leading to a return to a distinctly positive yield curve that would no doubt surprise
folks.

The performance of the US economy in 2019 has been dicey and it is not clear now whether
an easing of the monetary reins will be sufficient to assure that the US economy will firm up
enough to satisfy expectations built in to the new, lofty level of share prices. Such may well
be the case if the Fed keeps liquidity growth mild and does not open the tap as it might if a
full fledged recession needed to be tackled.

SPX -- Mid - Year, 2019

The SPX has reached an interesting point at present and from several perspectives. My forward
looking economic indicators have been signaling a slowdown in real growth was in prospect for
well over a year (confirmed). The business profits indicators have been warning of a flattening
of profits over much of the same period, and with a trend of weakening pricing power, profits for
the second half of the year could dip lower. On the flip side, the Fed has backed off further from
major quantitative tightening of excess system reserves and this has led to an improvement in the
growth of monetary liquidity. Moreover, the Fed and other major central banks have indicated
they may be prepared to cut short term interest rates, especially if trade disputes continue to
suppress economic growth. The improvement in the trend of monetary liquidity is a market
positive for sure, but the timing of such a turn as a a market support and booster is hard to gauge.

From my perspective, as the SPX approaches the 3000 level, it is becoming increasingly over-
valued and is overbought against its 40 wk m/a, which by the way, has yet to turn up in a
meaningful way. To top it off, the SPX is threatening to reverse positively on its very important
longer term MACD measure (bottom panel of the chart).  SPX Weekly

Market players are arguing briskly about prospects for the remainder of 2019 and for good
reason.

Gold Price

Gold made a significant low around the end of 2015. By my pro-inflation indicators, the gold price
gain reflects partial recoveries in the price of oil and other industrial commodities. The US dollar
has weakened slightly in value over this time frame. As gold cycled along. it has scored steadily
higher lows, but has not experienced a sharp price breakout until recently.  Gold Price

The global economy has slowed in growth over the past year, and inflation has actually de-
celerated. It appears  then that the recent sharp rise in the gold price reflects a multi-cushion
billiard shot. As the economy has slowed and as US-China trade war tensions have continued,
major central banks are signaling they are prepared to ease monetary and credit conditions as
may be needed to keep the global economic expansion intact if even at a more moderate pace.
There is a geopolitical issue as well that could have major consequences for economies and
inflation too. I naturally refer to the stand-off between the US and Iran, with Iran now
suffering economic decline as a result of formidable sanctions imposed on the Its economy with
special focus on oil sales, Its cash inflow lifeline. Iran has rebuffed talking about how to get
sanctions relief and has grown belligerent instead. The US and Iran have have experienced
skirmishes before, but now we have strong economic sanctions in play coupled with Iran's
strengthened military capabilities. Iran can now make big time trouble not only in the Gulf
but across the Middle East as well. Rising tensions not only reflect Trump "reality TV"
bluster but an Iran that is being seriously squeezed economically with no visible off-ramp it
could easily tolerate. There are several ways this issue might be resolved short of military
action, but rash behavior in the Gulf area could easily touch off an incident where tension
could quickly turn into a fire fight. Many interested parties will be at G-20 this weekend in
Osaka this and the US v. Iran has been forced on to the docket.

There are some prospects for higher inflation ahead, but since visibility of said process is
currently zilch, gold players have to be careful not to get carried away with enthusiasm just
riding the current hype and keep eyes peeled on the fundamentals as they unfold.

Note that the chart shows the strongest weekly RSI for gold in several years. It is overbought.

SPX -- Update

If the trade spat with China deepens, market players may want to re-assess their expectations for
the SPX. Additional punitive actions by both countries will nick earnings estimates for the
market, and likely higher inflation may cause investors to trim the SPX p/e ratio. China has
been running an elaborate stall on meeting the substantial reforms to Its economic policies and
practices demanded by team Trump. The week ended with anger expressed by both sides. Trump
promises deeper tariffs, but it might be more prudent for both sides to let the situation cool off
for a while so that tempers can be brought into check.

The SPX was overbought on a short term basis as we entered last week, so the escalation of
trade tensions provided a convenient excuse for traders to take some profits in the wake of the
furious run up in the market since late 2018.

My primary monetary liquidity measures suggest caution on economic and profits growth
estimates through 2020, and my weekly cyclical fundamental indicators remain on the flat side
dating back to early 2018. Fundamental support to raise short term interest rates further has
waned some because capacity utilization measures have eased and because my short term credit
supply / demand ratio is below levels that signal demand overheat. For now, I am keeping my
fair value estimate for the SPX at 2650.

To win re-election, Trump needs to press the Fed to keep short rates low and to be careful with
the continued application of tariffs on China. The Street is counting on him to do this. The
guys want to keep the market on the rise and also worry about what the Democrats might do
with tax rates on the wealthy and on business if they win big next year.

SPX Weekly

SPX -- Up Beats Down

The market has exceeded my expectations so far this year. At Christmas time 2018, the SPX was
sitting at 2350 and I posted that it was reasonably priced with a fair value set at 2650. I still
think this is a sound estimate of fair value and now regard the SPX as modestly overpriced. My
views on the economy have changed little since the Mar. 14 post (just below), and as I have
thought more about the fundamental outlook, I realize I could make a late cycle "thread the
needle" forecast of SPX 3000 based on low inflation and interest rates and an economy that
improves just enough over the next 12 months to produce some further slight improvement in
earnings, all underwritten by a continuation of sharply rising private sector short term credit
growth. This type of scenario would create a clear cut overpriced and well overextended SPX.
On top of all that, I think we can say with assurance that Trump will try to do whatever he
believes will keep the market  trending higher through 2020.

But, to be honest, we have had a damn fine run from the brink of disaster in 2009 and I am
more than happy with 2650 on the SPX. Moreover, I am finding it all boring and am perfectly
content to let others gild the lily.

A few years back, Tim Geithner, former head of the New York Fed, who partnered with Fed
Chairman Ben Bernanke and Treasury Secretary Jim Paulsen to engineer a bailout of the
financial system in 2008-09, said: "We saved the economy, but we lost the country." Prophetic
words indeed, and maybe the truth if Trump wins another four year term. Thinking about
what it may take  to build something decent and good in the US for future generations is
not boring like the stock market has become, and it's where I am spending my time these days.

Looking Ahead....

From my perspective, the outlook for the US economy is getting a little dicey. my favorite
financial liquidity measures have deteriorated markedly over the past year or so. Fed Bank Credit
and the Monetary Base continue to shrink. Real or inflation adjusted M-1 growth has been
declining and is now barely in positive territory. There is not sufficient financial liquidity in the
US system to support both real economic growth and a rising stock market on a sustainable basis.
On the plus side, private sector credit growth is still positive and short term interest rates have not
increased enough to assure development of a recession in the US. As well, the economic slow-
down may have suppressed some of the financial liquidity measures temporarily provided the
economy can regain more positive footing in the months ahead. In short, economic trouble may
lie ahead but it is not a lead pipe cinch. One also may reason that if more economic red flags
appear, The Fed may intervene with additional liquidity and cuts to short term rates. This is a
reasonable assumption, given Trump's willingness to challenge The Fed openly along with a
supporting cast of risk capital managers.

There is now a consensus that the US and China may strike a trade deal. If so, this will remove
an obvious negative for the global economy and it might help the prospects for US business
and corporate profits out through 2020 and beyond. But damage has been done to the US base
of liquidity and it remains an open question whether there will be enough benefit to put the US
economy on a more solid footing.

If a trade deal with China is struck, it will of course be quite interesting to see the details and
whether any concessions China may have made will be enforceable. Trump let economic issues
with China out of the bag, and if the deal lets China off the hook enforcement wise, figure the
Democrats will look for ways to make an issue of it.

If I was a younger guy actively managing money, I would likely be stuck selling the recent
rally and building a cash kitty to await improvement in the US liquidity environment.

The SPX chart still shows a near term overbought condition and trouble staying above the
2800 level.  SPX Daily

SPX -- Update

Back on Christmas '18, I opined that the stock market was quite reasonable down at 2350 and
that I was comfortable with SPX 2650 as a fair value call for 2019 - 2020. The market has
already jumped over that level, but I am not inclined to increase the fair value assumption at this
point in time. The evidence continues to point to decelerating US and  global economic and
profits growth in the year ahead and there is but a smattering of excess financial liquidity in the
system to fuel the stock market ahead as the real economy has been gobbling up the modest
liquidity available. On the bright side, inflation pressure has moderated and the Fed has taken Its
foot off the break. The up trends in interest rates in evidence in 2018 have broken down, thus
confirming the Fed's more dovish tone. But there is plenty that could still go wrong. There could
be a nasty Brexit, the US and China could still screw up the trade talks, and the global economy
could slow further and faster of its own. I am also a little nervous that there is such hard and fast
consensus that the inflation rate will not misbehave but stay gentle. I also do not like the wild
swings in investor sentiment in view since late 2017. In summary, I am conservative on SPX
earning power through 2020 and am carrying a lower p/e ratio estimate in the 2650 fair value
number (SPX eps projected around $160).

For the short term, the SPX is getting overbought and continues to have an unnaturally steep
positive trajectory.  SPX Daily

True China Giant Goes To His Rest

Li Rui joined the the communist party in China in 1937. He witnessed the entire revolution and
as a former confidante of Mao, he saw the dark side of the Chinese moon. He died a few days ago
at the age of 101. Betrayed years ago by his wife, he carried on, preaching against authoritarianism,
and as a demonstration of how that ugly centralized power continues today, his daughter announced
she will boycott his funeral. Know your enemy.....Li Rui Obit NY Times

Monetary Policy

The economic indicators suggest The Fed should keep short term interest rates trending higher.
Economic growth has been solid, capacity utilization continues to grind slowly higher and
business short term credit demand has strengthened substantially over the past 12 - months.
these conditions offer classic support for pushing short rates higher. The labor market has
tightened appreciably, and although there is still excess productive capacity in the system, it is
difficult at best to be confident that its deployment will prove economic. So, bowing to very
intensive criticism, The Fed  has opted to follow a more temperate course in the hopes that
continued US economic growth will not lead to a substantial cyclical acceleration of inflation.

 The economy may experience slower real growth this year compared to 2018, but the addition
of additional production capacity cannot lag to far behind, less an imbalance in favor of economic
demand develops.

The Fed is also planning to operate monetary policy with "ample reserves". This statement implies
that continued quantitative tightening, or the reduction of  the size of Its balance sheet, will likely
proceed far more judiciously than over the past two years. On its face, this statement opens the
door to potentially dramatically higher rates of inflation further out ahead as global excess capacity
is eventually used up. Fed Chair Powell's rather inglorious capitulation to all the forces that wish
to party on leave him with the hope that maybe the inflationary thrust will be the worry of
subsequent Fed leaders.

In the short run, a growing real economy is making full use of available monetary liquidity. In
conditions such as this, it is normally difficult to sustain a powerful upthrust in stocks. Without
a significant slowdown in the pace of economic expansion, large equities players will have to
sell other assets if they wish to sharply bolster commitments to stocks.

What happens if the strong consensus for only continued modest inflation proves faulty and
inflation pressure again perks up? Powell will look like a real turkey as the Fed has to begin to
turn the boat around.

Stock Market -- The Thundering Herd

Going into Christmas, the herd was stampeding downhill. Following the holiday, the herd has
reversed course and is now on a moonshot trajectory (75 degree angle of ascent). The Fed was
brought under assault from many quarters for running too tight a monetary policy as the year
wore down and it relented on interest rate policy. One can argue that chair Powell had no genuine
theoretical premise for the policy of gradually but steadily raising short rates, and the Fed has
ceded control over rate setting to the demands of risk capital for now.

In my last post, I posited that the SPX had reached reasonable levels down at 2350 and I briefly
sketched out a rationale for saying 2650 was an OK fair value estimate for the 2019 - 2020
period. The post-Christmas spike low and moonshot rally is statistically suspect, but lo and
behold, the SPX has been running back up toward the 2650 level. I find this performance to be
astounding and the emotional roller coaster that market players have been on over the past 12 -
14 odd months to be something of a bad joke.

It would be comforting to me at least if investors began to pause in the weeks ahead to review
what they have wrought and to take stock in a calmer assessment of what uncertainties and
opportunities may lie ahead.

SPX Weekly

SPX -- Update

Santa was a no show, contrary to my hopes. Instead, and through Christmas Eve, we have an SPX
in fee fall on a bear chart, as players who were wildly enthusiastic at the outset of the year, turned
panicky toward the very end. I would suggest against trying to call a bottom to this panic until
some degree of stabilization shows up. The decline in the SPX below its 200 day m/a has been
steep enough to render the market deeply oversold on an intermediate term basis, but history
shows declines of this magnitude have further downside to go as often as not.  SPX Daily

Everyone knows about concerns regarding a slowdown of US economic growth in the context of
slowing global economic demand. We also know that the US vs. China trade spat could intensify,
and that there are issues in Europe including Brexit, Italy and socio-political worries. We now
also have The Donald threatening the Fed and exhibiting inconsistency on a wide range of
domestic and foreign policy issues. Overt meddling with the Fed is inherently dangerous.

Even if the US economy slows down significantly over 2019 - 20, as long as no clear warnings of
recession show up, the SPX is reasonably priced on basic fundamentals so long as businesses
continue to show positive cash flow and the financial system can retain most of its current
relatively strong position. Based on the fundamentals, I would not quibble with assigning fair
value of 2650 to the SPX through early 2020. However, investors need to watch the Fed like
hawks to assure themselves that They are not removing liquidity too quickly through the QT
program.

I did argue last year that the 2019 - 20 interval would involve a deep sell - off in the market.
History shows that strong declines tend to occur every 7 - 9 years, and the market is running
overdue. I do not know whether the current free fall pattern is the kick off or not. I would be
delighted if we could make it through the Trump term ending in early 2021 at 2500. 

SPX -- Where's The Holiday Spirit?

Both the US economy and the global economy at large should experience further slowdowns next
year and SPX earnings estimates are being clipped. Today, on an intraday basis, the market tested
critical support at 2600 before rallying up from it. My analysis of a host of intermediate term
indicators plainly suggests that the SPX is vulnerable to further downside before a less risky
long side trade would be warranted. But, and call me a sentimental old fool, 2018 was a good
year for the US economy and though there are well known risks for next year, it is outre in my
view to have the market break lower over Christmastide for God sake. Let's have a nice holiday
season and salt the worries about next year away until January. SPX Daily

Stock Market update -- Fundamentals

The US economy is showing numerous preliminary signs that a slowdown is dawning. As well,
the various leading eco. indicators have been losing positive momentum since early this year
and this steady trend signals a slowdown of growth ahead. My analysis finds nothing serious
yet and I conclude it is premature to talk about a recession. But there maybe a pronounced
downturn in the expansion ahead and critical as always will be inventory management by all
levels of business. The supply management software is there to provide comprehensive and
timely inventory data right down to mom/pop businesses. What I watch in the short run is
inventory to sales data and any signs there may be inventory speculation underway. With
inflation still modest and with short rates even for prime borrowers now running at least 2%,
there is sufficient reason avoid speculation and manage working capital carefully. 'Wolf at the
door' recession scenarios do not seem appropriate at this time.

However, a pronounced economic slowdown will have an adverse impact on profit estimates
and I think the market has already started the process of discounting more modest growth in
business profits as the US appears set to join a global slowdown.

Whether the recent stock market correction is sufficient to allay most fears is hard to say, but
it is tougher to expect strong and sustainable price rallies when market players are concerned
the longer term direction of profits growth momentum may be more sluggish than recently
thought likely.

The Fed is coming under increasing and substantial pressure to slow or even halt its policy of
tightening credit via hikes in short rates. If the Fed succumbs to the pressure, it may trigger a
'relief' up leg in stocks, but such an event will only serve to complicate the Fed's job later on
when a final stage economic expansion may develop. You also need to keep in mind that the
Fed still seems intent on shrinking financial liquidity via downsizing its balance sheet.
So far, the possible deflationary impact on p/e ratios from this  era of liquidity tightening has
been displaced by large fiscal stimulus and deficit budget financing. but without additional fiscal
loosening measures, the quantitative tightening under way will re-assert itself with probable
negative effects for the various forms of risk capital to occur down the road.

A heavy duty trade war with China will be broadly economically destructive. Let us hope that
the principals can finesse the situation, but I suggest you keep in mind that neither Xi or The
Donald are the sharpest knives in the drawer by any stretch.

Stock Market Update -- SPX Chart

I'll tackle the fundamentals later in the week, but let's look at the chart first.  SPX Weekly

The market just closed a touch above the long term trend line going back to 2009. So, it is still a
cyclical bull of long duration. However, the important trend up from early 2016 has been
broken, and that uptrend marked the third wave up for the market since 2009. So, by my
reckoning, it remains to be seen whether the bull may soon run out of gas or whether there is
some sort of bonus round up in store.

Note that the 40wk. m/a of the SPX has recently turned down for the first time since the second
half of 2015. There can be sudden whipsaws here, but a downward shift in the 40wk. m/a often
signals further weakness lies ahead even if it is not especially dramatic. The market is oversold in
the short run, and sentiment is rather bearish. So, there could be a bounce ahead, and looking at
the stochastic in the top panel, there is reason for optimism in that positive turns in this measure
after it reaches a low point often do signal a bounce. Naturally, there can be a whipsaw here, too.

There are still plenty of players out there who do not see a cyclical top in this market until some
time next year. To accomplish this, the negative downtrends in SPX momentum since earlier this
year, as captured by the MACD and KST measures in the bottom two channels of the chart,
would have to reverse in a significant positive fashion. Now, to be fair to the bears out there, it is
worth saying that intermediate downtrends in price momentum measures often presage actual
further price corrections in the market.

I have said in the recent past that this has been a lovely ride up from the depths of 2009, and that
this market really does not owe us anything now, given how close we were to true economic
disaster or Armageddon over 2008-09. So, for now I am content to see the SPX trade in a range
of  2600-2850, and I would be delighted if we can make it through 2020 at SPX 2500.

Stock Market Update

Back in January of this year, I argued that the market was way overbought and that the odds of
continued strong, positive performance were very low. Here we are in October with the SPX
trading a little below its Jan. high.The big premium in the SPX over its 40 week m/a has finally
been wrung out. Long term, the market is still in a positive mode, but barely so. Moreover, the
intermediate term reading of the important MACD indicator is on the cusp of turning down and,
the major supporting trend lines have all been violated. Conveniently, the SPX has just had an
OK test of the 40 week m/a. However, from a technical perspective it will soon need a fresh upleg
to keep the bull intact.  SPX Weekly

From a cyclical perspective, the economy is gracefully edging into the twilight of its expansion
period. The labor market has tightened with skilled workers now at a premium. There is some
idle productive capacity in the system, but we cannot be sure how economic it is. On the plus
side, my short term credit supply / demand pressure gauge is in reasonable balance and banking
system liquidity is in decent shape. Inflation has been accelerating, but the trend has been rather
mild and uneven. Interest rates, short to long term, remain in firm cyclical up trends although
the bond market, ever sensitive to the degree of economic momentum, continues volatile.

Business sales and earnings growth has exceeded expectations this year and with inflation
running mild, investor consensus now has the SPX rising to the 3000 level as the current year
winds down, with further gains projected through mid - 2019. Beyond that point, market
players are considerably less sure of continued progress.

I do not now have a compelling argument to deny the bulls another round of up sweep for
the SPX over the next six to nine months. But do not tarry boys.

Stock And Bond Markets

As a long time conservative and highly disciplined markets player, I have to say that both the
stock and bond market are just too rich for my blood. I have some major retirement projects
at hand, but before going, I will leave some commentary on the major capital markets.

SPX
I have to say that with the market just below its most long term overbought condition in nearly 40
years, I have been a little surprised that we have not seen a more negative reaction. I do not pretend
to have a good idea of how stocks will behave for the rest of 2018, but I have some suspicions. For
one, I believe the bigger funds are playing the presidential election cycle. This is year two of The
Donald's reign, and in keeping with the cycle, players are expecting a strong positive run later in
2018, with a consensus high for the year of about SPX 3000. I also suspect that most big time
investors expect the current Trump initiated trade conflicts to remain inherently modest and not
escalate into a much larger and open ended trade war with the US vs. China the key players. In my
view China's aggressive mercantilism needs a nasty comeuppance, but Trump may not want to
call in heavy fire on his own position. As The Donald himself likes to say, "We'll have to wait and
see" on this one. The market also does not seem very concerned about a Dem "blue wave" victory
in the upcoming mid term election this Nov. Lord, would such an event shake things up in DC.

The SPX is now currently rising above my estimate of SPX fair value of 2720 to run well into
2019. This is a rather liberal estimate and leaves significant downside for the market if the
fundamentals disappoint expectations. The market has broken its trend line off the 2016 low, but
is still postive above its rising 40 week m/a. SPX weekly  I would have an interest in a long side
trade if the SPX somehow rolls on down to 2500.

By the way, should the SPX enter a strong, late cycle powerful rally up to 3200 by early 2019,
it will have reached bubble territory on my super long term semi-log chart.

Bond Market
Right now, I would not trade the 30yr Treasury in my account below  4%. However, as the
cycle progresses toward an eventual economic downturn, and if the inflation rate is still
modest, that would suggest to me that a fresh recession could again introduce deflation, and
that would introduce a new element of interest for sure.

Gold Price
I am monitoring this one for a long side trade provided the USD falls sharply out of favor.

I plan to return to the blog again in November.

Gold Price

The gold price has recently entered a sharp downtrend. It is fast approaching an oversold reading
on the important RSI technical measure and may, given its inherent volatility, test intermediate
term support at the $1200 level. A relatively strong US economy, rising short term interest rates,
and more recently, Trump inspired talk of a trade war, have all worked to strengthen the USD.
Sudden dollar strength has weakened trader support for bullion. Gold Weekly

Within a couple of weeks, all markets players may get a stronger sense of whether the Trumpsters
are running a bluff on China or whether They really are ready for a long, long overdue battle
with China over Its mercantilist policies. Knowing Trump, if his crew can establish some headline
trade and investment restrictive programs which do not upset the apple carts but give him some
bragging rights, he may go for that rather than go for the more punishing programs that could
could unsettle the US economy and bring blame to his doorstep. If the tough talk is just a typical
bluff, the dollar may eventually lose some ground and usher in a long side trade in gold.

Stock Market Update

Looking at fundamentals and valuation, I see little if anything to add to the 5/21 "Looking Ahead"
post (see immediately below). As I read, I note there is a new conventional market wisdom about
Trump : Namely, that his bark is much worse than his bite. May be. But please note that he has
yet to face a major economic or policy crisis. This guy is eminently capable of fucking up big
time, especially when one of his obsessions is seriously challenged. So if you are in the game,
best pay attention to what he is up to. Now, looking ahead, there could be an issue for the market
regarding the Congressional election this autumn. It would be normal for the GOP to lose seats
in the House and the Senate, although there are a number of Democrats up for re-election in
the Senate this year in conservative and borderline states, so the once popular idea of a "blue
wave" that could sweep the Democrats into control of  capitol hill currently seems less assured.
In the meantime however, the market may experience some angst anyway, as a "blue wave"
would prompt strong, critical reviews of the current pro-business policies in place.

From a technical perspective, the market needs to clear short term resistance just below SPX  2800
some time fairly soon to convince traders that a new up leg is solidifying.  SPX Daily

SPX -- Looking Ahead

Fundamentals
Total business sales have been ticking along at nearly 6.5% yr/yr. With reasonably strong
volumes and a price/ cost ratio fairly even, pretax margins have been advancing, and bottom lines
are enjoying the large extra kicker from the tax cuts. As well, inventories are being managed well
compared to other growth spurts during this long expansion period. Stock buybacks are surging,
providing extra fillips to net per share. But businesses are committing to higher levels of capital
spending as well, which will add to productive capacity in 2019 - 20.

Interest rates are in clear up trends across the board and do seem poised to go higher well into
next year as the Fed continues to tighten monetary policy. Inflation pressure is inching ahead and
there is no indication of a sharp acceleration of pricing as yet.

There may well be some slowdown in economic growth momentum as this year progresses, but
it may well be more modest than I originally expected if business inventories continue to grow
at a  moderate pace.

The earnings / price yield for SPX based on estimated net per share sits at 5.8% and is well above
the 91 day T-bill yield. This indicates that monetary policy is tightening only gradually and it may
not threaten the market near term.

Valuation
Despite reasonably attractive fundamentals, I have the SPX as no better than fairly valued looking
right into 2019. So, strong upside from current levels rests on the development of some sort of
speculative zeal for stocks as the economic / profits expansion matures and the Fed presses
onward in its bid to "normalize" rates.

Technicals
The SPX is struggling to regain sustainable positive momentum after coming off a generationally
strong overbought condition brought on by the big wave up over the latter part of last year. I
would like to think the SPX is set for a shot at the former highs over the next couple of months,
but I do not think it unreasonable to look for the market to complete a deeper correction that
would bring it to a more solid intermediate term bottom.

SPX Daily

SPX -- Weekly

The historic and obvious overbought we saw at the end of Jan. '18 has corrected down to neutral.
The prospect of a significant increase in earning power is being realized via the large fiscal stimulus
programs enacted by the force of Trump / GOP. However, there is no evidence yet that it will add
to business sales or top line growth going forward. The Fed appears on track to tighten money
further as it shrinks its balance sheet and the monetary base and  promises to keep on raising short
term rates in a gradual fashion. Some Trump influence downside is being felt. The US is taking a
hard line with China on trade and is now threatening Iran that it may walk away from the nuclear
deal and perhaps re-impose sanctions that could boost the oil price further. And, even though the
Trump / Kim prospective summit is intriguing and may be positive, wrong turns could leave us
staring at additional saber rattling. As well, Trump and the far right of the GOP may be readying
to provoke a judicial if not a constitutional crisis over the Mueller investigation. Why, it has
almost become what we used to call a Thinking Man's market.

The bulls are left to put their heads down and plow forward. Longer term momentum measures
are rolling over, but the market has drifted from big time overbought down to neutral, is holding
support at SPX 2600, and is maintaining its uptrend off the 2016 low. There are no clear signs that
a recession lies nearby and the inflation rate is not threatening yet to take off higher. Moreover,
if you accept liberal valuation standards, the SPX is fairly valued.

SPX Weekly