Monetary Policy -- The Fed Abides...

Zero Bound Short Term Rates
The case for increasing short term rates has eroded since the latter part of 2014. My ISM
composite for new orders has declined from a powerful 65.9 last Aug. to a more moderate
54.7. US capacity Utilization % has declined from the 79 - 80% area to 78.4 % more
recently. My short term supply / credit demand indicator dropped from  a moderate +6.1 in
favor of demand down to +5.2. Since mid- 2014, the CPI measured y/y has decelerated
from 2% to flat.

Ms. Yellen and key members of the Board plainly want to see faster economic growth,
more intense utilization of resources, and a more normal cyclical acceleration of inflation
pressure before responding with a boost to short rates and Ms. Yellen, at least, desires
assurances that a step up in economic activity has enough staying power to draw some
more of the underemployed and longer term unemployed back into  the workforce on a
regular full time basis.

Financial Liquidity
For months my position has been that the termination of the large QE 3 program would
lead to slower economic and profits growth. Measured y/y, total system liquidity growth,
to include the Fed's balance sheet, has fallen from a very strong 11.1% in early 2014 down
to 5.5% currently. I see that as a sizable loss of tailwind for the economic expansion and
a significant impediment to business profits.

US economic progress has also been retarded by work stoppages on west coast docks, severe
winter weather across the eastern two - thirds of the country, reduced oil and gas drilling
activity and the effects of a strong dollar on US competitiveness.

The Fed may be in no mood to confess to the negative economic potential inherent in
terminating QE 3, but the Board wishes to see how the economy responds as the transitory
seasonal and labor dispute factors finish playing out. Thereafter, we all have to confront
whether the reduced liquidity growth discussed above will continue to hamper economic
growth or whether the private sector will continue to respond positively enough to provide
sufficient liquidity to generate moderate economic progress.

Providing the economy begins to grow more rapidly as this year unfolds, the Fed will be
at liberty to push up short rates periodically rather than steadily.

SPX -- Daily

Since the SPX failed to make a decisive new high today, there is a short term mechanical sell
signal in place which some traders will follow. Perhaps more importantly, the uptrend line for
the SPX will hit 2100 at the end of next week and this will force more traders to decide whether
they want to continue to be in the SPX on the long side or whether there are better spots
elsewhere. The action in the SPX since Oct. '14 is about to be squeezed down to an intolerably
tight range and thus trend in the market will be forced to change for good or ill. SPX Daily
The positive element here is that the SPX is not overbought shorter term and thus has some
room to move up further.

I want to add a fundamental note here as well . March was another miserable weather month
for the eastern two-thirds of the US. For most of Mar., the mean daily temp. in my area of NY
was 18 F. The current month was better, but we had snow flurries yesterday and are a under a
hard freeze warning for this overnight. The point here is that with unseasonable weather,
economic data for Mar. at least may be suppressed again as in Q 1 '15.
 

Global Economic Supply / Demand

In the post Great Global Recession period, worldwide production resource growth has expanded
steadily with little apparent mothballing of plant. Business pricing power overall appears to gain
little or no leverage unless demand grows about 4% y/y. Since the spring of 2014, global demand  
growth in terms of output has slowed from 3.8% y/y to about 3% reflecting growth deceleration
in the advanced economies plus a sharp slowdown in China's industrial output. Nowhere has the
development of excess productive capacity captured investor attention more than the oil output
sector which has seen prices fall by 50%.

The US has ended its quantitative easing program, but has sufficient liquidity to grow its economy
moderately as more seasonal weather returns and the effects of the winter time west coast port
terminal labor difficulties wear off. Moreover, China has stepped up monetary easing substantially
and the EZ and Japan have major QE programs underway. It is not unreasonable then to expect
global output growth to return to the 4% y/y level in real terms and for capacity utilization to
stabilize and recover some as 2015 progresses. This leaves a significant probability that inflation
pressures may re-emerge excluding the oil and gas sectors and that we may also see a hastening of
of a significant, partial re - balancing of supply / demand in the oil sector, too.

SPX - Daily

Today's sell off leaves the SPX at intermediate term trend support of 2080. It ain't over 'til its
over. SPX Daily

Oil Price -- Big Test Ahead

The oil price continues in its first sustained uptrend since the crash. The recent action has seen
WTI crude take out previous highs so far this year, and oil is now headed up to an RSI overbought
for the first time since Jun.2014. The strong positive price action for crude is consistent with a
typical seasonal spurt  over Mar. / Apr. in anticipation of a rise in gasoline demand. If the oil price
follows the conventional seasonal pattern, it will top out shortly and not see sustainable strength
again until the end of Jul. '15. Traders currently long the market need to consider carefully
whether to hold those positions through the early summer. WTIC Daily

SPX -- Daily

The SPX has stayed in an uptrend off the Oct.'14 lows. It has thus been holding trend support,
but has had greater difficulty holding the higher ground on rallies since the end of Mar., with
the resistance line now having moved up to SPX 2100. SPX Daily

It is worth noting that not only is 2100 short term resistance but it has become longer term
overhead as well, as the uptrend line from the late 2011 lows is now sitting a little above 2100.

For the short term then, it is all about whether the SPX can move on up to push nicely above
the 2100 level or whether the market is falling into an expanded trading range. The two bottom
channels of the chart show relative strength lines for the MS World index (excluding the US)
and euro Stoxx 600 compared to the SP 500. The global market ex the US is outperforming
the SPX and the Stoxx 600 is a particular favorite of traders who have moved the "QE moment-
um playbook" away from the US over to Europe to catch the ECB's QE program. The two
relative strength charts clearly show positive trend reversals in favor of major offshore markets
as opposed to the SP 500 after the SPX held sway for an extended period.
 

SPX -- Monthly

Looking back over SPX monthly chart for the longer run, there have been few MACD negative
crossovers during the past 20 years. SPX Monthly When they have occurred, the market has
either corrected meaningfully or entered a full blown bear. There is nothing biblical here, only
that negative changes in momentum have tended to involve follow through. Since the MACD
can whipsaw, there is no gospel here, only a possible red flag to keep in mind.

The monthly SPX chart shows what we already know, namely that the bull market in force has
been losing momentum for well over a year. The primary fundamentals that I use to view the
market suggest the bull may have entered a transition period from its reliance on the Fed's QE
as investors and traders try and gauge how well the market will hold up in a less generous
liquidity environment where progress of the real economy as it bounces back from the west
coast port strikes and bitter winter weather may or may not be hefty enough to have the Fed
signal Its intentions regarding  the ZIRP policy less ambiguously.

SPX -- Daily, Longer Term

US history shows that there have been few large bouts of sumptuous - sized QE and when they
are brought to a close, it is bad for the economy and for the stock market. QE 3, which was one
of the biggest programs, closed out last autumn after an extended period of tapering. The economy
has slowed markedly as expected but has not tanked, and the SPX has continued on to new highs
but with a steady erosion of positive momentum. The powerful run in the market from the latter
part of 2011 was based on the QE program and rising investor confidence as evidenced by a large
increase of the market's P/E ratio. It was a spectacular move which would have the SPX at 2400
now had it continued its brisk pace. SPX Daily

The SPX is still in bull mode, and my primary fundamental indicators have seen some erosion,
but remain positive, so there is no sell signal from me. But, the tempering of investor confidence
since last summer is appropriate. QE or not, whenever the Fed freezes the size of its balance sheet,
there is eventual trouble for the market, and the longer the freeze, the bigger the trouble. At present,
there is sufficient monetary liquidity in the system and plenty of financial support in the banking
system that the economy can regenerate sufficiently from a punishing winter to provide better
earnings out ahead. As long as consumer, business and banking confidence holds up, the
financial wherewithal and resources are there to support growth through 2016. The stock market
could be adversely affected initially when short term interest rates begin to rise, but should
have the resiliency to weather the end of the ZIRP and move on so long as the Fed follows a
slow and very gradual course.

If the economy can successfully transition away from dependence on QE, and confidence holds
up, then the next major threat to the stock market would come as monetary liquidity in real terms
begins to dissipate just as confidence moves into a frothier period. But that is not in the cards
right now. In the meantime, investors will have to put up with the volatility that may continue
as the economy moves into a more self - sustaining mode.