Of Stocks And Bonds

The recent sharp rise in the stock market has forced me out of the game and not just to the

sidelines. For example, the SPX, now trading above 3800, would have to fall by more than

1,000 points to attract my interest on the long side. I would not hazard a guess how it will

do in the near term, but it would not surprise me to see it trading at the current level in three 

year's time. At this point the SPX is already overbought and hyper-extended not only on a

long term basis but in the near term as well. It could be just in a speculative blow-off stage,

but it might be in a bubble, with Lord only knows how much upside is left and eventually

with big downside as well. There is talk of a new valuation paradigm which all players will

have to live with, and in the unlikely even such is so, then I have done my last long side

trade. The bullish talk continues to be inspired by the huge glut of monetary liquidity in

the market which is keeping short term interest rates near the zero-bound and is seen as 

forcing money into stocks.

I did participate rather fully in the greatest bull market in bonds in US history. For years on

end, it was like shooting fish in a barrel. But I have not done any long side trades in bonds

since the long Treasury fell below 3.5% in yield. with long term inflation risk of at least 3%,

I am still out of bonds, and even though yields are rising on a cyclical basis, I will stay away

until the 3.5% threshold is met.

SPX At 3627

 The variety of directional market indicators I follow point positive for the SPX. But there are

 also signs that the market is high both on technical  and fundamental grounds. The SPX is

getting very overbought for the intermediate term, is quite overvalued, and is getting hyper-

extended when viewed on a very long term basis.  So, if you are trading or investing, be 

aware that you playing in a very effervescent and expensive market. The rapid acceleration

of Covid cases may well do more economic damage well into next year and could lead  to

some extensive volatility in the market. The news on the Covid vaccine front sounds terrific,

but even with high efficacy and broad distribution, the economy will take time to regain

solid footing. Even if SPX net per share were to hit new high ground of $200 by 2022,

  the market is hardly on the bargain table at an assumed p/e of 18.1x. Moreover, a

 broader and stronger economy by late next year may bring significant inflation

pressure and rising bond yields. These latter developments could crimp the market p/e

even if the Fed keeps short rates low to accomodate a move to fuller employment.

 

I am on the sideline now and it would take a substantial correction to get me interested in

a long side trade. I sure as hell did not see the "blue wave"  I was hoping for, and I think

the popular view of political gridlock will turn out to prove disappointing for the economy

and investors. If the Dems do not sweep the senate run-offs in Georgia, times could turn

very frustrating for a guy like me as I believe the economy needs a substantial overhaul

if the US is to do well in the years ahead.

 

SPX -- Brief Update For The Short Term.

 The shorter lead time economic indicators point to a moderation of the pace of recovery

 both in the US and abroad, save for China. The recovery in business profits across the US

 and Europe is projected to moderate. This data basically does not include the future impact

 of widespread efforts to contain a new and dramatic upturn in Covid-19 cases. This will be

 a patchwork affair, ranging from countrywide lock downs to more targeted and limited

 controls. However you slice it, the outlook ahead is rather muddied. For the US, the 2020

 national election may play a major role in how the economy plays out. For example, a

 Trump loss and retention of a Senate majority may in effect lead to scorching the earth as

 Mr. Trump just allows the Covid cases to run up while Sen. McConnell blows off any 

 chance for needed, sizable stimulus. A "Blue sweep" could ease matters somewhat in

 the near term.

The SPX is nearing a correction, but is still far from being oversold for the intermediate term.

 It could turn out that if there is a big blue wave the SPX could rally off short term support,

 but if this occurs, there could be considerable volatility anyway as the SPX is far from

 being oversold even after the recent sharp decline.

 

 I have been a registered Democrat for sixty years and am hoping the Dems kick ass across

 the board.

 

Notes On Economy & Markets

Economy

The US economy has improved sharply from the spring depression level lows. However there is still

plenty of slack. The business strength indicator has recovered rapidly to the 127 level, but is still

below the 140 - 145 area which indicates solid expansion and strong resource utilization. My profits 

measure has continued to improve but is still well below positive. The labor market remains down-

trodden with 30 million people collecting some form of unemployment insurance. The price deflation

measure has eased dramatically, but still signals more business defaults ahead. My leading indicators

signal that a slower rate of economic improvement may lie ahead.

 

Markets  

The SPX is still overbought for the intermediate term, but less so. The market trend is still positive.

Importantly, large and broad unweighted measures such as the  Value Line Arithmetic ($VLE) are

slightly below the 2018 high, and show clear evidence of market player preference for large cap.

stocks, especially the big techs. I look far more favorably on stocks when the unweighted averages

are leading the market higher.

The gold price has outperformed the SPX since the spring of 2019 and has beaten the pants off the

"average stock" over the same interval. Gold has gone parabolic as it often does when it is in a 

bullish phase. It is technically overbought and awaits further weakness in the SPX to regain strong

favor.

The US Dollar is technically oversold at present and has started a counter up move on player

concerns that the US economy may well lose recovery momentum in the months ahead. A

slower pace of economic growth would reduce inflation expectations and might also worry

folks about how well the global economy will do. My key indicator for the Dollar is the ratio

of the balance of payments to GDP. That ratio continues to improve, but I think market players

have a much broader macro view of the currency at this time. 

Finally, I am one of  those folks who doubt Trump will accept an election defeat. If he loses, there 

could be some harrowing moments for the US and its markets.

SPX And The Liquidity Tsunami

Well, they have gone out and done it this time. A super easy Fed with help from generous fiscal policy has allowed monetary liquidity to balloon  to 40% yr/yr, a historic record. with the economy  still depressed, the velocity of money has tanked with the extra liquidity flowing to the financial and capital markets. What's more the Fed is now apparently willing to have inflation move up over the longstanding target to foster a stronger labor market and put an end to the deflation pressure created by the rapid decline in the economy during the Covid lock down phase. Normally,with this kind of stimulus, the US economy would surge for a bit, but with the longer term potential of the economy inherently modest, the eventual recovery of money velocity will primarily reflect higher inflation. If so, we will eventually see higher bond yields, a reduced SPX p/e ratio, and, perhaps a lower value for the USD.

The stock market has been having a party. The SPX has been in a wicked sharp upturn and at a nearly

14% premium to its 40 wk. m/a is sufficiently overbought to render the market unlikely to make

substantial progress over the next six months. But, since we are dealing with such a huge swell of

liquidity, it could, however unlikely, surprise to the upside. By my reckoning, if the SPX moves

above the recent 3508 up to 3800 in the months ahead, we will be in a dangerous price bubble.

SPX Weekly

 

 

SPX -- Quickie Update

The re-opening of the US economy has been a rather muted success. Sure, business sales and
production have bounced back sharply, and my profits indicator, although still negative on a yr/yr
basis, is improving. Unfortunately, initial claims for unemployment insurance is still running at
an awful 1.3 mil. a week. From a Covid-19 perspective, the economic reopening has been a
disaster, featuring a sharp run-up in both cases and deaths. In states across the south and west,
health delivery systems are being sorely taxed with the risk of humanitarian issues on the rise in
spots like GA, FL, TX and AZ. The rise in cases  may well partly account for the rise in claims.
Across the US, many localities face risky school autumn openings because cases are rising
and testing and contact tracing have become less useful. I am not about to speculate on whether
the virus is practically out of control and whether efforts to tame it will cause additional and
substantial economic damage. So, I would not care to speculate on how well the economy and
the markets will do over the next few weeks and months. The sheer large number of dumbfucks
both in office and among the public have cost us dearly health-wise and we can only hope that
common sense will regain more footing.

The intermediate term trend indicators remain positive for the SPX. It has been range-bound for
a short period of time. The SPX is currently moderately overbought at a 6.5% premium to its
40 wk. m/a.  SPX Weekly  

SPX -- Update

Fundamentals
On balance, the US economy is showing a degree of recovery from deeply depressed levels.
Retail sales have come back nicely and output levels have moved up some. My profits ahead
indicator reads -15.4 which is awful but not as bad  as at the bottom in 2009. My business strength
indicator (BSI) is a lowly 107.9, which also exceeds the bottom in 2009 (A sound, healthy BSI
runs 140 -145). It remains very concerning that nearly 25 million people have lost their jobs and
that more recent data suggests that more upscale employees are being laid off. As the economy
continues to re-open, many more workers will be recalled, but the upscale earning jobs that are
lost will be very slow to comeback. There is huge slack in the economy, and even though raw
materials prices have been recovering, deflationary and default pressures will continue for a
while. The Fed remains just about fully accomodative, but Congress is juggling the ball here
on fiscal policy with an off-chance there could be a fuck up later this summer. So far, market
players have been letting the 2020 national election ride.

SPX Chart
The recovery uptrend from late Mar. was broken on a correction of a sharp overbought and the
SPX is now in a downtrend which is so early as to be inconclusive. The market is mildly over-
bought against the 200 day m/a, and the negative rollover in MACD bears watching. The
continued high VIX reading implies more volatility.  DailySPX