SPX Monthly Chart -- Points Of Interest

Long Term "Progress"
By my way of thinking, the US has been in a bull market since 1982. Earnings and dividends have
progressed and with a deceleration of inflation and a lengthy downtrend of interest rates, the p/e
ratio has increased, especially over 1982 - 1993, as investors have bid down the discount or hurdle
rate required to find stocks attractive. The p/e multiple has held up despite more volatility of earnings
as companies have run more aggressive finance policies such as raising the earnings plowback rate,
buying in far more shares for the treasury, making many acquisitions using purchase accounting,
underfunding or eliminating pensions, and with the connivance of the accounting profession,
ruthlessly writing off their failures as "extraordinary items" instead of charging losses to operating
earnings. Most investors have applauded it all.

With decelerating inflation and globalization both making it tougher to generate pricing power,
companies have worked wonders slashing overheads and operating expenses. Investors have
welcomed this progress in increasing profitability. Investors who have called for a return of
profit margins back down to historical levels have been continuously frustrated.

 Most companies have increasingly focused on achieving investor pleasing short term results.
There are few very talented CEOs with the vision to grow their companies longer term, but
a goodly number of CEOs who have the ability to see around corners when it comes to their
own shorter run self interest.

What we have yet to learn of course is the price companies may have to pay for ignoring the
long run.

For good measure, and to keep the deflationary wolf from the door during this lengthy period
of "disinflation", the Fed has stood willing to provide copious amounts of liquidity when the
occasion required such.

On To the Chart
If you have been along for the ride, it has been good enough. Since year end 1993, SPX net
per share has increased by about 7.5% annually and the index has gained 7.7% per.
SPX Monthly

Looking at the chart and connecting the tops from 2010 and 2011, note that the market is
getting extended. Note also that the channel up from the low in late 2011 is not so extended.
If the latter channel stays in force and carries the day we will likely be moving into a giddier
blow off phase for awhile.

Watch the monthly chart as you go forward. The MACD over the past 20 years has provided
good guidance.If the blue line breaks below the brown one there may be trouble. Otherwise,
we may be OK. Note also the RSI trend which has been heading up since early 2009. A
break in that uptrend my also require your attention.

SPX -- Weekly

The Three Year Weekly Chart....
Since late 2011, the SPX has advanced relatively steadily in a low to high channel of 13%, and
has kept on a 20% average annual growth track. This performance has been reminiscent of the
spectacular 1995 - 1999 bubble run up although the current advance has been on a far more
moderate trajectory. If the SPX could sustain this strong pace through 2015, it would bring the
average up to 2500, a level well above what a very broadly positive consensus is forecasting.
Such an advance would bring the p/e ratio for the SPX to 20x, nearly double the level of
2011. There is non-bubble empirical support for another big year in that when inflation and
interest rates were low in the 1960 - 65 period during a period of stronger economic expansion,
the market did trade up toward the 20x level. Growth is not as rapid now, but interest rates and
the inflation rate are exceedingly low. SPX Weekly Chart

I think the major key behind the strong market advance in recent years has been the Fed's QE
programs both in prospect and in actuality. These programs have greatly boosted investor
confidence and have sustained a psychology of buying price dips, with all episodes seeing the
SPX go on to new highs. Note carefully on the chart though that price momentum has been
fading during 2014, in keeping I think with the progressive phase out of the large QE program.
Not only that, but players have become more defensive in stock selection and have stayed cool
on smaller cap, more traditionally volatile issues. With QE over since the early autumn, the SPX
has been trading more toward low end of the trend range in recent months.

Now, I do not pretend to have special insight on how well the market will perform in 2015.
Monetary liquidity growth is going to continue to decelerate through the year and excess
growth of liquidity relative to the needs of the real economy will likely continue to fade.
If the USD - Japan Yen relationship remains strong in favor of the dollar, there may be a
positive liquidity partial offset in the form of an expanding carry trade. As well, it might
come to pass that there will be a significant rotation out of bonds into stocks if the Fed opts
to push short rates up by 50 basis points or so as a further tightening trial.

I think players have bought the idea that some growth with low inflation and interest rates
gives them carte blanche to see how far they can push up the multiple. There is a large
degree of intoxication there. However, I also think the guys know they are playing with
fire in the game of extending the p/e multiple further. Just witness the fast, herd instinct
whipsaw action we have seen in recent months.

We can speculate happily on the potential for market return in the year ahead, but be sure to
recognize that  market risk has become sharply elevated as the US transitions more fully
away from powerful liquidity support at a time when investor confidence and enthusiasm are
running high.
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I have linked to a chart of the SPX which compares it to a 200 day m/a oscillator in green.
The chart shows a gradual deterioration of price momentum going back to the middle of
2013. This gradual downtrend in momentum is a bit unusual, but if it extends well into next
year, it would put the SPX on a more modest course relative to the 2011 - 2014 uptrend.

SPX vs. SPX relative to the 200 day m/a

Long Treasury Bond Yield

The long bond yield  has been in a steep downtrend since the early 1980s. When you roll in price
appreciation with interest earned (including of course the interest earned on coupon re-
investment), It has been one hell of a bull market. Noteworthy here is that there exists a five year
base under the yield downtrend at the 2.5 - 2.6 % area. The long T has approached this base
recently on a strong downtrend in yield from the outset of 2014.

Despite economic recovery in place since 2009, the yield has remained in a somewhat volatile
down trail primarily reflecting the deceleration of the inflation rate in the US since latter 2011,
and the Fed's policy of keeping short term interest rates near zero. Obviously, the large T-bond
purchases involved through the three QE programs have helped. TYX Weekly

We approach 2015 as follows. Inflation is still in a downtrend underscored by weak oil, sensitive
material and commodities prices. The Fed is maintaining its ZIRP on short rates for now, but
could elect to abandon ZIRP later in the year if the economy expands firmly and more dissention
flares up among members of the FOMC. The QE programs have ended although the Fed is still
committed to buying securities equal in value to those that run off.

With total financial system liquidity growth having rolled over on y/y % basis, it is reasonable
to assume the economy will lose significant growth momentum at some point soon, unless
confidence remains high and credit flows to the private sector move as needed. In that latter
case, the Fed will likely respond by aborting ZIRP and starting to raise the Fed funds rate.
That would be an important negative for the bond market as it would signal that the Fed
was committing to normalizing policy. The market may seek to cross this bridge ahead of the
Fed as it did in 2013, but we should also gauge carefully how the economy does on its new
liquidity deceleration diet.

If you click again on the chart link, I would point out that the T-bond yield has moved down a little
fast relative to its 40 wk m/a. This is a sign of an "overbought" market as is the  28% decline in
52 wk momentum as seen in the top panel. Wherever the yield goes through next year, it
has had a run that may be too good in the short term

Oil Price

The free fall in the oil price over H2 has created hundreds of experts on the future of its
price. The many forecasts for 2015 range from $20 - 85 bl. so I do not know how useful
all this newly minted expert testimony is since it covers most of the waterfront. What I do
know is that the closing weeks of the year is a time for brief seasonal strength in the price.
My argument has been that a failure to see either a stabilization in price or a rally as the
year draws to a close might spell further significant downside as 2015 unfolds.

My view has been that the best place to be regarding the oil price is on the sidelines. The minor
price bounce this week has hardly been imposing and, another weak seasonal round is ahead
for the Jan. - Feb. period as refineries gauge what might be desirable gasoline blends for
the driving season to come in the spring. WTIC crude can easily drop another $15 bl. during
this layover. Moreover, it may be Jan. '15 at the earliest when the current rapid downtrend
line is tested. Since the oil price has a way of trending up or down for extended periods,
it does not pay to try to catch tops or bottoms but does pay to look for trend reversals instead.

WTIC Daily

SPX Daily -- The Thundering Herd

On Tues. 12/15 (scroll down), I mentioned the SPX had become oversold enough to attract
long side interest, and we sure got it. SPX Daily

The action since mid - Sep. largely features HERD behavior with rapid downs and ups. Nearly
mindless players appear to be driving the market in the short run. I can understand the increased
volatility up to a point. Folks know it is an expensive market with large downside if the
fundamentals go wrong. And, they know that moving heavily into cash which offers negative
real returns is not a place they want to be for long if the market starts up again. For many years
I would tell people that the stock market was a serious business but one not to be taken too
seriously. And now, as I glide toward life's Hawaii room, I am starting to look at the stock market
as not being a serious business but one that should be taken very seriously if you have money
invested. Let us hope this is the storm before the calm.

Monetary Policy

By post WW 2 standards, the Fed surely should have raised the FFR% today and abandoned
its ZIRP. By these standards, the Fed is now engaging in heavy handed interest rate suppression.
So, what gives? Interestingly, The Fed's data on production capacity growth shows that it is
on an accelerating path, reaching 3.1% yr/yr in Nov. That represents the strongest reading of
capacity expansion since 2001, and suggests to the FOMC that the economy can tolerate
continued moderate production growth without running a high risk of overheating. And, I
think They are figuring that by keeping the ZIRP in place, additional time can be bought to
allow more slack to be wrung out of the labor market so that there is eventually stronger
full - time employment and, perhaps, some upward pressure on wage rates.

Industrial output rose a strong 5.2% yr/yr through Nov. It may also be that the Fed suspects
that this pace of growth is unsustainable especially now that it has allowed the QE program
to expire. The Fed does not want to have to come back with another QE maneuver and by
allowing short rates to hover at the zero bound level for a longer period of time, it can buy
some more insurance to extend the economic expansion. We all need to keep in mind that
we live in a highly leveraged world, and with low inflation yet still decelerating, central
banks would like dearly to avoid having the deflation wolf come to the door.

Finally, the Fed may wish to tone down the rise in the value of the US $. If keeping the
ZIRP in place for awhile will help retard the dollar's progress, well that may be ok, too
as The Fed and the Treasury know full well that foreign issuance of US $ denominated debt
has proliferated in recent years.

SPX -- Daily

The fast correction in the SPX from Sep. into mid - Oct. ended with a spike bottom and a
quick, triumphant rally to new highs. The argument here has been that spike bottoms are
frequently tested and that the market has been overbought since mid - Nov. To compound it,
the insouciant "buy the dip" crowd tried hard for a few weeks to push the market higher even
though it was already in a significant overbought condition. The hope here was to cruise
through the ending days of 2014 on an upswing with a combo Santa Claus and Sugar Plum
Fairy rally and to leave whatever worries to be sorted out early next year.

However, it only took a very brief period without good positive momentum for another
pullback to develop and send the market into another sharp short term downtrend. The SPX
is now mildly oversold and should begin to attract long side interest soon. However, even
if the SPX were to begin rallying again here in the next few days, it would put the trend off the
spike Oct. low on a very high trajectory which would likely not sustain before the market
would face more remedial action. SPX Daily

Financial System Liquidity

Private sector liquidity growth has been averaging around 5.5% yr/yr recently. This growth has
been sufficient to fund the real economy, especially given the low rate of inflation. Total
sector liquidity growth to include the Fed's balance sheet was up 7.5% yr/yr through Nov.
Funding requirements for the stock and bond markets continue to be supported by the excess
liquidity provided by the Fed. But note that the Fed's balance sheet is no longer growing and that
total financial sector liquidity expansion measured yr/yr is falling steadily and appreciably. The
Fed is thus tightening monetary policy with the tapering and now expiration of QE 3.

Paced by 10 % growth of business loans, the banking system's total loan book continues to
expand. However, system liquidity remains strong as the banks have been able to grow the
loan book as well as add to short term Treasury positions. My short term credit / supply
pressure gauge is firming up in favor of demand. The gauge is a mild +5.0 but has increased
sharply since late 2013, a fact that will not be lost on the rate hawks at the Fed.

My markets cash reserve indicator has reversed course since mid - 2014 and is now rising.
The action is mild so far, but it signals a bit more portfolio manager caution on equities in
recent months.

Shanghai Quickie

When folks love the Shanghai composite, they really love it. The recent vertical move up is
right in there with the bubble inflation starting in late 2006 and the high speed run - up
starting in late 2009 when the big credit stimulus package was announced. Shanghai Daily

The RSI has topped 90 in the recent skyward move and that by the Shanghai's gaudy standards
is an overbought of consequence. Note as well that the index is now testing longer term price
resistance in the 3000 - 3200 range.

Stock Market -- Short term

Fundamentals
The SPX is up 12.3% for the year through Dec.5. Most US portfolios have underperformed this
benchmark by a significant margin. Charitably, the average portfolio is up about 3.5 - 4.0% for
the same period. The broad economy has been comparatively strong this year. Business pricing
power has not been strong, however, with sharp weakness evident for the oil patch and a range
of commodities producers. In addition, a stronger dollar may have attracted some offshore
money into the US, but it is penalizing the eps of a number of multinationals via translation
penalties, and it concerns some holders of small cap domestic shares who know that a stronger
dollar can attract foreign competition in previously more secure markets. Finally, the expiration
of QE 3 has led to a rotation in favor of large cap established companies and away from the
shares of smaller companies where volatility is higher.

It is also interesting to note that the SP 500 has been matched in performance this year by the
long Treasury bond. This reflects both risk aversion from the end of QE 3 as well as the
continuation of low inflation and short rates at the zero bound level.

Check out the relative performance of the SPX against The Russell 2000, the Value Line
1700+ issue equal weighted index and the Long Treas. SPX Weekly

Favorable monthly data for new orders, employment, auto sales etc. have helped the market
recover from the recent Oct. lows. Despite the sparkle of the monthly data, the weekly
forward looking indicators have been trending down since early Aug. and suggest that an
economic slowdown may not be far off.

Technical
As pointed out in a note on Nov. 13, the SPX is overbought. Since, it has soldiered on to hold
that overbought. SPX Daily  Players have been reluctant to leave the party for the big cap stocks
in hopes that they will be rewarded with a nice Santa rally as the year winds up.