Stock Market Factors

Players failed to maintain the tight consolidation leading up to the Fed's FOMC meeting
early next week. The bravura of  "QE, who needs it?" was tweaked by traders who think
another taper down is on the table for the policy meeting and who have enjoyed last year's
$1 tril. tailwind. They have issues with a further curtailment of the QE 3 program. Profit
taking after last year's big run - up seemed in order. Nastily, the market went out today at
the low with no clear sign of where it might catch bids. Here is the factors chart: SPXhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p69864090460


The top panel shows the VIX or volatility index. More trouble would be indicated if the VIX
tops the 20 level and moves higher. The VIX shows but modest fear in the market now.


The next panel down shows the SPX itself. The short term trend up from Oct. '13 has been
broken. The important trend line up from Nov. '12 will be broken if next week is a down
week. The major trend line higher from the autumn of 2011 offers support at SPX 1650, and
this shows how extended the market remains despite the sell off this week. The market
stands at 4.7% over its 40 week m/a, so about half of the big overbought has been worked off
this year already.


The third panel of the chart shows the strength of the SPX vs. the 30 yr. Treas. bond. The
SPX has underperformed the bond since late 2013 and is on the cusp of rolling over in
trend following a lengthy rise of relative strength. The bond was heavily oversold by late
last year, and players who fear further shrinkage of  the QE 3 program will slow economic
progress have moved some $ back into Treasuries.


The final panel shows the index of relative strength for the cyclical stocks. It is rolling over
as investors have recently turned more defensive following a nice, extended run by the
cyclicals. Sometimes, a downturn in the RS of the cyclicals signals that further downside
action may be in store for the broad market. Sometimes not.


The horizontal line set at SPX 1700 in that portion of the chart marks my view that investors
remain too confident that all will be well this year and that the SPX should be trading at a
less grand p/e ratio.