SPX -- Weekly

Technical
The cyclical bull continues on. Momentum indicators are trending positively but are starting
to approach overbought levels for the first time since late 2013. SPX Weekly There is room to
the upside short run, but the move off the spring low of 1820 is well advanced.

Fundamentals
The market has been more sensitive to the weekly economic data. My weekly cyclical funda-
mental indicator (WCFI) is up 6.2% for the year so far, while the SPX is up 6.1%. Moreover,
the strength in the WCFI this year was primarily from mid - Feb. to the end of May, which
corresponds to the bulk of the positive action for the SPX. The WCFI was essentially flat
through Jun. which also corresponds to the anemic positive action for the market during the month.
Two important items in the WCFI -- unemployment insurance claims and sensitive materials
prices --  have provided no lift to the broader indicator since May. Since both these elements
of the WCFI are forward looking, it means market players are looking for confirmation that
the economy is set to stay on a stronger footing.

Long Treasury Price

In The Short Term
The TLT fund has been an excellent performer  so far in 2014, rising from support at 100 to
115 recently before settling down some. TLT Weekly It has been my oft stated view that the
weakness in the stock last year was way overdone and that strength this year was a positive
reaction to a deep oversold that developed as last year wore on. There is a mild downtrend line
in price dating from mid - 2012 which is being tested now as traders ponder whether a new
bull leg is underway or whether we have seen an appealingly strong counter - trend rally that
is about to run its course.

I have a caution light for the TLT price now. My shorter term yield directional indicator
(industrial output + sensitive materials prices) has been trending gently up since the middle
of 2012 and has reached all - time peaks seen in 2007 and 2011. This means that the industrial
economy may finally be ready to lift out of a lengthy period of consolidation which has favored
the bond market into a more advanced cyclical stage of expansion which may be less friendly
to the fixed income sectors. That will be so if industrial production continues to expand at a
moderate pace.

In The Longer Run
The TLT fund fell to a price of 90 at points over both 2010 and 2011 when long Treasury
spiked well over 4%. When a broad range of monthly economic and financial data is reviewed, 
it turns out that there are no basic numerical differences between now and the 2010 and 2011
periods when rates spiked. What is different, and this may be crucial if the economy can keep
expanding at a rate fast enough to use idle resources, is that unlike both 2010 and 11, confidence
in the maintainance of the ZIRP policy by the Fed is much stronger now.  In short, TLT may
have substantial downside price risk if the economy progresses to the point when the Fed
decides to raise short term interest rates.

There has yet to be a decisive breakout in my yield directional indicator. But a test is ahead
and, since the Fed is already suppressing short rates, it is appropriate to recognize the major
downside price risk to TLT even if the Fed continues ZIRP in the months just ahead.

Gold Price

Gold has seemed ripe for a cyclical bounce on stronger monthly economic data and and
the assumption of a moderate cyclical acceleration of inflation. Since the autumn of 2013,
the dollar value of industrial output measured yr/yr has advanced from 4.2% to 6.5% through
May. In addition, the oil price has been rising from a seasonal low in Jan., 2014. These are
mild cyclical positives for gold but in no way supported the price rocket we observed for
bullion from late 2013 into Mar. Gold Price Daily

The gold price may have have benefited form the inability of the SPX to break out from the
1850 resistance area earlier this year. Note on the chart how it lost luster when the SPX did
subsequently move above 1850 (SPX is in bottom panel of chart).

The gold price is below its high for the year but is on a more sustainable path of recovery
to reflect expected stronger inflation. But there was a lesson in the early going which is
that gold may benefit rotationally if the stock market falters. Weaker gold and a stronger
stock market since the autumn of 2011 suggests strongly a stocks sell off, should one occur, may temporarily benefit gold even if the cyclical case for the metal is not consistently supportive
as some gold bulls return to the fold.

Oil Price & Oil Stocks

Since global economic recovery took hold in mid - 2009, the basic trend of the oil price has
risen +12% per year and the "normal" high / low range has been about  $20 bl on WTIC. The
current range is about $98 - 118. The market has been well supplied this year, so the oil
price has been rising comparatively gently until the crisis in Iraq caught the news. The oil
price is winding up a period of seasonal weakness and the Iraqi situation may have kept the
crude price above $100 bl in June. WTIC Weekly

Holding Iraq aside, it would be fair to see oil reach a bit above $120 at its seasonal peak based
on past experience, but since the price has had a relatively mild and stable advance so far in
2014, my $120 projection for this autumn looks a bit suspect, and it make take production
disturbances in Iraq to bring oil up to the $120 level.

Even if production disruptions in Iraq over the next 12 months are minimal, industry experts
are counting on Iraq to produce an extra 3-4 million bd over the long term, so unless there is
a relatively peaceable political reconciliation there, traders may add a premium to the price
of crude to account for the risk of a major production growth shortfall should Iraq remain
unstable or even dissolve into separate political entities. The risk of a production shut down
in southern Iraq's major southern fields now appears remote given the activation of a very
large group of Shia militias from Baghdad on south to Basra and the presence of US attack
aircraft in the region. In the current fluid situation, The US must first protect Its large
embassy in Baghdad, but since an unlikely run by ISIS down to Basra could trigger a large
increase in the price of crude, the US, however reluctantly, might launch air strikes down
in the region.

The relative strength of the oil group against the SPX is shown in the bottom panel of the chart.
As expected this large out of favor group has experienced a positive reversal of fortune on
expectations that stronger global economic growth coupled with low spare capacity at the
wellhead would be a a nice plus for relative performance. In addition, continuing price
recovery in natural gas is helping along.The RS line for the XOI is coming up on resistance
at .90, and may falter without further positive crude price momentum in the months ahead.

Inflation Potential

The view here since last autumn is that faster liquidity growth would lead to somewhat faster
global economic growth and that such would produce some acceleration of inflation. I have
been looking favorably on oil, natural gas, gold, silver and commodities in general. Measured
yr/yr, the CPI has moved up from a depressed 1.0% for Oct. '13 to 2.1% currently. My
forward looking inflation gauges are continuing to advance as well. Consider the yr/yr rate
of change in the CRB commodities composite (top panel) CRB Weekly

However, the world is after all still trying to shake off the effects of steep global recession, so
you need to exercise some discretion here. There is still slack in global productive capacity
and in key large developed economies such as the US, wage gains have barely kept up with
inflation as slack continues in the labor markets as well. To sustain accelerating inflation in
a normal cyclical fashion, there eventually has to be follow through to wage rates or else real
incomes can be punished enough to weaken growth of demand.

Materials and commodities prices have been rising and there have been some positive cyclical
moves for traders to capture. But it is still too early in the game to pronounce the return of
substantial inflation on a more durable basis.

The CRB has recovered up to the 310 - 315 area. The model I run on commodities suggests
fair value is at 335. At that level, there would be a better balance between supply and demand.
So, there is some value in the commodities sectors but realize that economic demand has to
remain firm for an extended period to take up the slack.

Monetary Policy & System Liquidity

Short Term Rates
The cyclical case for raising short term interest rates is in place, although it is not a table
pounder as cyclical pressures although present are not that powerful. So, the US is finally
in an era of rate suppression. Because of the technical difficulties in raising rates during
a period of substantial QE, the issue probably remains tabled until the QE program ends later
this year. The 2yr Treas. note shows signs that investors are putting biases on an end to
ZIRP and some upward pressure on the inflation rate. US2Yr.

Liquidity Cycle
Banks are expanding the scope of lending. There have even been upticks in home mortgage
and home equity balances. The broad measure of credit driven funding (excluding QE) is
up 6.5% yr/yr through May which is strong enough given inflation of only 2%. The monthly
growth of private sector liquidity funding now exceeds that of QE as the cycle edges into a
more mature phase. With the dollar value of industrial output rising at 6.5%, the Fed is likely
reasonably satisfied with progress in 2014 to date. Still, the responsiveness has been a long
time in coming, and the balanced growth and funding will have to continue after QE is retired
for the tapering program to be a success and for the Fed to have leeway to begin a return to
more nearly normal operation of monetary policy.

Economic & Profits Indicators

Coincident Economic Indicator
The US economy continues to strengthen over the stall speed levels seen from late 2012
through early 2014. The economy has picked up from one / third speed to two / thirds
with my CEI through May at + 2.0% yr/yr. There is a continuing drag on the economy from
low employment growth plus flat real incomes reflecting modestly higher inflation and
low wage and entitlements growth. Household confidence has improved and consumers are
willing to borrow more and this has helped sustain faster business sales and production growth.
Moreover, economic recovery / expansion is broadening out. Overall, still far from pretty but
better than it was.

Business Profits Indicators
My proxy for business sales -- the value of industrial output measured yr/yr -- was up 6.5% in
May. This is the strongest reading since mid - 2012, and hits my projection for what sales should
be doing for the remainder of the year. Profit margins should be expanding now on the
stronger volume growth and an improving selling price / cost ratio as a little extra pricing
power has developed. The one negative here was a faster build in inventories relative to sales
earlier this spring. This may be part of a bounce back from the nasty winter, but keep an eye
on it.

Production capacity shrunk from 2009 - 2011, but is recovering modestly, rising to + 2.4% yr/yr
in May. The addition of real capital for business is a healthy long term development, although
further strength in the growth of production and delivery capacity may eventually slow share
buybacks with a pivot in budgets.

Stronger business sales this year is crimping the growth of financial liquidity that may be
available to flow into the capital markets. The partial offset for equities investors is faster
earnings growth.

SPX -- Daily Chart

The market hit an overbought situation early in the week, and with no momentum follow -
through, traders are taking some money off the table. SPX Daily Chart Note the RSI and
MACD readings for early in the week. The SPX was not strongly overbought against its 25
day m/a. The market remains in an uptrend off the Apr. 2014 and will remain so if it can
hold above 1920 in the next couple of trading days. You should probably take note of a
prospective reversal in the downtrend of the VIX. If such occurs, this signal would imply
that the developing complacency among players could be evaporating and that a degree of
further price attrition may lie ahead.

Traders did not care for the data on retail sales released today. Sales were positive but less
than hoped for. There was also a strong move up in the oil price which is seen as threatening
the growth of discretionary income. With QE tapering proceeding, players are less forgiving
of economic data shortfalls.

Oil traders have their first little bit of excitement in a while and aim to make the most of it
as the news tape from Iraq unfolds. How much further down the road to Iraq's dissolution
this all goes is still a tough issue. The Kurds may well have opted out of the union today
by taking Kirkuk, a northern city / oil center they have long considered their own. Whether
the new jihadis can make into Baghdad remains to be seen. If the US is prepared to initiate
air strikes, the militants will need to disperse quickly as proud columns of troops in trucks
can be eliminated fast by US attack aircraft. And, if the US is prepared to use air strikes,
the militants will be hard pressed to carry their fight to the big oil fields and terminals in
the far south of Iraq. The other key swing factor in the early going will be Shia troops or
militias and whether and where they might be prepared to join the battle.

Appointment In Samarra

Samarra lies about 70 miles due north of Baghdad. That's where the Sunni Islamist militants
are nibbling at the outskirts of this ancient city. They have already overrun Iraq's northern oil
fields, refineries and pipelines. With  a small, combat seasoned, heavily armed force, they may
capture the northern half of Iraq. Native Sunni tribal chiefs, the military and the police have
largely quit their posts. No refugee flow has has grown so large in so quick a time in history.
The militants have naturally hit all the banks on the road to Baghdad and have scooped up tons
of abandoned weaponry. They hold a huge territorial area area with a small force but lots of local assistance.

The Iraqi government is imperiled, the Kurds rush to defend their border, and Turkey is busy
warning the Islamist militants off. It has the makings of a very big story, and how it plays out
from here will fascinate. But for the markets in the near time there will be the question of what happens to the production, refinement and transport of crude and downstream products from
this major producer. WTIC Crude Daily

Oil is in an uptrend and is challenging resistance again. Reaction to this explosive situation in
Iraq has been muted so far, but things are happening at lightening speed on the ground.

Google Shows The Story

Growth company Google resumed market leadership after the last substantial market
correction way back in 2011. A stock with a decent beta, it corrected sharply earlier this year
along with about 60% of the total market. GOOGL Daily Note the test of the 200 day m/a in
early May. Lots of technicians watched that action with baited breath. Note as well the action
of the intermediate term MACD. About 60% of the total market fell into a similar MACD
pattern including the fact that probably less than 50% of the market has experienced sufficient
price momentum to cross the zero line on the way up. You will note that Google like most stocks
has yet to cross over into positive territory on MACD. That tells you that despite the rally in the
SPX, there is still above average risk in the market.

Stock Market -- Weekly

Technical
As indicated in the 5/30 SPX weekly (scroll down) the market has broken out of a congestion
zone to new highs. The breakout extended this week with the SPX closing in on the channel
top in place since autumn 2011. SPX Weekly The MACD, though historically in an upper
register, has turned positive to confirm the breakout. You have to go back to the late 1990s
bubble years to find a weekly MACD reading which has remained so continuously highly
elevated. The market is also 7.5% above the 40 wk m/a and is inching up to another strong
overbought reading. Historically, buying into these sorts of elevated momentum and MACD
markets works out profitably only about 25% of the time, but investors have made it pay
nicely since the spring of last year when the market was propelled up to high levels on these
important measures. (In the interim, more conservative traders like me have been left out in
the cold.) The RSI is overbought, but the chart shows how an overbought reading can last
several weeks especially when price momentum hums along.

The VIX index shows new levels of confidence and complacency were reached this week,
and may be its time to take note of this even granting that a low VIX reading can continue for
a good several weeks running.

Price momentum is o.k. and market breadth is solid. Volume remains awful and this may well
bother players considerably more if prices continue to trend higher on light volume.

Fundamentals
Purchasing manager combined data for new orders have been positive throughout the recovery
but showed a trend of deteriorating momentum from late 2010 through mid - 2013. Save for
the recent winter (Jan. / Feb.), combined new order data has been relatively strong since mid -
2013 and weekly leading economic indicator data remain in an 18 month uptrend. Moreover,
banks have been lending in support of higher working capital needs. Investor focus has
meanwhile shifted from the Fed's QE program which is now winding down to the better
business fundamentals. Earnings estimates are inching up after months when estimates were
consistently cut and this has helped stocks recently.

With QE tapering substantial and ongoing and business data at the forefront again, investors
should be become increasingly sensitive to how well the economy is doing. This is a big
change from last year when mounting monetary liquidity was the dominant theme, and players
were very much more tolerant of slips in economic momentum.

Eurozone Quickly Revisited

With industrial output only marginally above 2010 and price deflation a couple of clicks away,
The ECB countered today by cutting rates, suspending sterilization of basic monetary liquidity
and via targeting more asset purchases and steps to make more credit available to smaller,
growing firms. All to the good because the steps increase liquidity that was on its way down
from modest positive levels. These moves are also designed to undercut support for the
Euro. Maybe these steps will postpone the development of dangerous deflationary pressures
by leading to an improvement in economic demand levels, but unless we see production growth
re-accelerate markedly, destabilizing social and political measures will intensify further.

The Eurozone stock market is getting overbought in the near term, as players have been
anticipating ECB easing action. But there could be more follow through in the near term
especially if business confidence responds just ahead because the ECB comes to be seen
as providing substantive cumulative support.

China -- Big Red Dragon Getting Cranked Again

Well, there was a spell or two in recent years when the the central bank (PBOC) tried to
tamp down the monetary press. Cumulatively, it hit the overheated real estate sector recently.
Now the PBOC has the long term growth of its money M-2 back up near 20%. The economy --
real GDP plus inflation -- needs only about 10% growth to function decently, so the rest of
the money finds its way into the property market and all the credit specialties that are in one
way or anther collateralized by real estate. In the early part of the past decade when China was
still in its super growth phase, I figured the authorities could balance growth against debt well
enough that a big and terrible blowout would not arrive until well after 2020. I did not change
my thinking much even after the collapse of the stock market bubble, but the gov. under Hu
and Wen panicked during the deep global recession  of 2008 - 09. Money and debt have
exploded up even as real economic progress has decelerated. So, in just five years time, China
has created a potential economic catastrophe for itself and those who are dependent on China prospering.

The authorities have far reaching reform plans and perhaps with periodic relatively short term
bouts of tight money that shake out the property and credit markets, China can re-balance its
economy and achieve sounder but very much more modest growth. Since patriotism is the last
resort of scoundrels, nationalism and militarism may play a more prominent role in China's
future as the authorities nudge the economy toward a lower growth path. The US sees that
China is in deep shit with its economy now, and will need to focus far more on China's offensive
military capabilities as time goes on.

Here is a chart of the Shanghai exchange. SSEC Daily I watch it because it is a post - bubble
depressed market and once in a while there is a good trade as occurred in late 2012 when the
Fed's QE program kicked in. I think if investors believed China had a good shot at sustaining
real GDP growth at 7.5% as is so often discussed as an objective, the SSEC would trade
more in a range of 2400 - 2500. Given the trend of the SSEC and the number of trips down
to the 2000 area, players have a lower target in mind for China growth. In any event, since
the PBOC is again adding liquidity, upticks in the economy could provide a nice rally for
a few months.

Eurozone: Kings Of The Phillips Curve

According to the Phillips Curve, inflation varies inversely to unemployment. The Eurozone
has persistent unemployment at a double digit rate and is veering toward deflation with a
recent CPI of 0.7% yr/yr. The ECB, which has struggled to keep the Euro economy afloat after Mr.
Trichet trashed recovery chances with an anti - inflation program in 2010 before he retired, is
set this week to ease policy further ostensibly with a cut to short rates and a program to make
more credit available to cash strapped smaller businesses. Euro M-1 money which had responded
nicely to easing polices under the Draghi regime has pitched down in growth to 5% yr/yr and
appears  on a recessionary and deflationary course unless the ECB engineers further liquidity
growth for the system. With private sector credit demand still falling and fiscal and regulatory restraint still the order of the day, the ECB is the only game in town. Moreover, social pressures
are building in the EZ and are fostering populist political movements. Further stagnation or
outright deflationary recession can only lead to more  social and political destabilization.

The Euro stock market could be interesting if The ECB can get away from minor tinkering and
fine tuning. Waiting much longer for further proof of economic deterioration before stepping
hard on the monetary accelerator could prove very risky in a deeply fundamental way.

IEV Euro 350 iShares  Note: the IEV is about 20% below the highs of 2007.