Stock Market -- SPX

The powerful 20% annual price momentum that drove the market higher from late 2011 until
well into 2014 has dissipated. The very large QE program of the Fed ended in the autumn of
last year. As expected, my proxy for business sales growth has declined from 7.1% y/y at 7/'14
down to about 1.5% y/y through April. S&P 500 net per share has rolled over to the downside.
The erosion of sales and earnings fundamentals reflects falling system liquidity growth that
preceded it coupled with bad winter weather and a sharp fall in oil and gas prices.

Comparatively, the SPX has been advancing at a modest 6% annual pace since very late 2014.
Erosion of US business has taken a heavy toll on the market's progress but has yet to break it.
The p/e ratio on 12 mos. net per share through Q 1 '15 is a hefty 19x. Plainly, investors expect
better times ahead.

My core fundamentals have been slipping, but may well not turn out to hit an "end of easy
money" sell signal until late this year or early 2016. The "easy money" buy signal has been
in place since early 2009, but it has not protected investors and traders from some sharp
sell - offs as occurred in 2010, 2011, and 2012 when QE programs tailed off temporarily.
Now, we see not only eroding liquidity growth but humble business performance as well.
I expect to see some bounce back in the business environment, and my weekly leading
economic indicator has been improving since early March this year. However, it still remains
to be seen whether private sector liquidity growth can remain strong enough to support business
confidence now that the Fed has frozen its balance sheet.

The elevated p/e multiple has been supported by zero bound short term interest rates and
the pronounced deceleration of inflation of recent years. If business does pick up as now
indicated, inflation pressure may intensify and the Fed will then have to confront the decision
of when to raise short term rates. Given how poorly the economy has behaved since the end
of QE 3, the Fed may want to give the issue of raising short rates considerable thought before
it proceeds. Even if the tone of business and consumer confidence remains satisfactory in the
wake of a hike in short rates, investors may well still face a challenge to the logic of such
an elevated p/e.

SPX Daily