Stock Market Comments

Fundamentals
Reflecting the global trend, US business sales growth has steadily lost momentum over the
past 18 months reflecting a deceleration of volume growth and a loss of pricing power. Profit
margins have ebbed modestly on a deterioration of the selling price / cost ratio  for business.
More recently, the US operating rate for business has also ebbed modestly, which further
curbs efficiency. Recession in Europe and sharply slowing growth in main Asian economies
have significantly curtailed US export sales momentum.

It has been my argument that by shrinking the prime base of monetary liquidity since mid -
2011, the Federal Reserve was gambling with the US economic recovery. Fortunately, since
the basic money supply in the US financial system did not suffer a loss of growth momentum
below danger levels while private sector credit growth began to expand modestly, the system
has not sustained the kind of liquidity privation that assures a full blown recession. There has
been damage, but so far, luck has been a lady for the Fed.

Monetary policy regarding liquidity has reversed from negative to positive. When there is a
deep downturn and low business and consumer confidence, a QE program can take up to a
year to foster recovery, but, when there has been only an economic slowdown with no large
loss of confidence, QE can bring support far, far more rapidly. Still, the Fed should speed up
Its program as it is behind schedule.

Ongoing QE and grinding improvement in private sector credit demand set a more positive base
case for the US economy in 2013. There may well be a hit to growth next year from resolution
of the fiscal cliff issue, but it is still too early to tell how large a penalty there will be. The
sensible course is for official Washington to strike a deal which both sides can crow about but
which does minimal economic damage to the real economy through mid - 2014. We'll see.

My core fundametals signal a positive environment for stocks next year provided the Fed does
not welch on its QE commitment. Stock market volatility should increase between now and
early Jan. as the President and  the Congress work their wills with the fiscal cliff.

When I look at cash reserves in the system, I think funds are already heavily deployed. Thus,
for the stock market to have a strong year, money is going to have to come out of the bond
market which has been a huge beneficiary of the deep recession / slow, painful recovery we
have witnessed over the past 5 years.

Technical
The market has been in sharp recovery mode over the past week. The tradable price
momentum oversold has been wiped out. The market has also been in a saw tooth down
pattern which should be tested this coming week on heavier volume. The price bounce is still
too young to have turned my indicators. I note however, that contrary to longer term history,
the market has been able to rally off the sharp down spikes in price over much of the current
cyclical bull advance as changes in trader sentiment have appeared to happen very rapidly. I
would love to see a retest of the recent low, but traders have been far less cautious during this
market. SPX Daily Chart