Stock Market Overview

Fundamentals
Primary: Positive but starting to fade. Easy money policy is still in place with ZIRP and strong
primary liquidity growth. But, evidence suggests the Fed is now suppressing short term interest
interest rates and the QE3 taper program is progressing and is now below 50% of the original
$85 bil. in monthly securities purchases. Bond yields are above their absolute cyclical lows but
are not threatening.
Secondary: Business sales and profits are expanding and there is sufficient economic slack to
support a couple of years of further growth without overheating and toppy earnings. The
expansion has broadened out, but there is still a drag effect imbalance between demand and
income, with the real wage not progressing. Consumption is becoming more reliant on credit
generation. But, note that the banking system is quite liquid still. Somewhat faster economic
growth is absorbing more liquidity now, and QE3, although shrinking in growth, continues
to provide liquidity in support of the capital markets. Keep the QE erosion in mind as it
will become more of an issue.

Valuation
The market is significantly overvalued on trend earnings and investors are being asked to pay
a slight premium multiple on elevated cyclical earnings. It can be argued that with companies
having moved over the past 20 years to an elevated rate of earnings plowback (60%), there
should be a premium for the faster earnings growth that a higher plowback implies. But since
the global economic pie has not expanded to meet this improved potential, earnings have
become more cyclically volatile as companies have had to shuck a greater number of losing
or sub par investments when the economic environment softens.

With elevated valuation, investors are looking further afield at foreign markets, PMs, selected
commodities and bonds (chasing yields down to levels unsustainable longer term).

Technical
The cyclical bull is in place and it has been strong enough off the 2009 low to suggest that a
new longer term bull may be underway. It is a an extended market on a long run basis, but
lacks the spectacular trajectory that indicates a price bubble is underway. Just remember
about this latter point -- there does not have to be a price bubble to have a very nasty cyclical
bear market or even a sudden crash - like decline.

The SPX is now getting quite overbought on the weekly chart. The weekly comment recently
passed anticipated the strength of just prior days, but it may be now that an interim top is fast
developing. SPX Weekly

It is interesting to note that there has not been a deep oversold since the autumn of 2011.