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

SPX -- Monthly

As indicated in the Jan. '18 posts, the SPX in the 2800s hit a generational overbought reading which
suggested little intermediate term or 3 - 6 month upside. At 2648 today, the market remains in
correction mode with significant support at SPX 2600. In the briefest of summaries, all the
fundamental indicators I study suggest only very mild, perhaps sluggish, progress from here this
year. Looking out through mid - 2019, I have the SPX fairly valued at 2720, or 2.7% above the
current level. Taking a longer view of the chart, the recent downturn in momentum is the first since
the end of 2015, and offers little comfort.  SPX Monthly

The US has to continue to work through a very troubling Trump presidency during a period of
a maturing economic expansion. Going back to 2016, I have argued that this guy is a basic,
textbook case of egomania who, through his impulsiveness and overwhelming sense of self
aggrandizement, can wind up doing some good things and some very bad things. Given how
far the market has come since the very dark days of 2008 - 2009, I would be delighted if the
SPX could hold the mid - 2500s through his term.