Stock Market

Technical

In last Friday's post I mentioned that the market had fallen to a
tradable oversold, but that I was not going to play this week, as
the recent action gave me considerable pause. Today, the SP 500
fell to a new cyclical closing low near 1260, taking out the double
bottom set earlier in the year around 1275. So, the oversold has
intensified, but now it may be wise to see if there is a breakaway
downleg in the offing. I am going to give it a few days, letting
everyone sleep on it over the long weekend.

Fundamental

The key elements I follow to see if there is a cyclical buy in the
offing are not in place yet. The drop in short rates is a positive,
but a rising level of corporate bond yields, particularly mediocre
credits, shows diminishing confidence in the economic
environment and is now a veto. As well, monetary liquidity
remains flattish and has yet to exhibit the "pop" that precedes
profit and market recoveries. (I do have a monetary base model
for the stock market, and this model stands a paltry 3% above
levels reached in early 2006.)

The SP 500 Market Tracker is in a clear cut bear market, with
the current reading of 1180 about 27% below its 7/07 high.
The drop reflects the recent acceleration of inflation and a decline
in the index of 12 month earnings for the "500" from 91.25 to
74.50 presently (-18.4% point to point). At 1261, the "500"
is trading 6.9% above the Tracker and has been losing its premium
steadily since mid-May, '08.

I'll pick this up tomorrow or Friday with a little conjecture work.