SPX -- Monthly

The argument here since last autumn has been that the end of the huge Fed QE 3 tailwind to
the economy  and the stock market would involve  penalties for both. So far, resulting economic
and market difficulties have not been major. The US economy slowed down as expected, and
deceleration of progress was made worse by severe winter weather and labor difficulty work
stoppages. With the Fed having frozen its balance sheet, financial system monetary liquidity  
growth is slowing markedly,  and the economy is becoming far more reliant on internally
generated cash flows and private sector credit growth to fund further progress. Transitions of
this sort have occurred frequently and successfully throughout US history but they can be very
difficult during those times when the economy and confidence have been heavily dependent on
large liquidity support. In turn, the SPX has lost its positive momentum and is trading on a par
with its highs seen last Nov.

My weekly leading economic indicators have recovered and suggest a mild rebound for the
economy during the second half of 2015. When measured yr/yr, business sales and earnings
should also improve modestly. As for the stock market, my "easy money buy signal", in
force since very early 2009, will likely end late in 2015 if the Fed starts to raise short term
rates as is now widely expected.

Speaking as a funds manager and not a retiree, when the "easy money buy" comes to an end,
it would be time for me to acknowledge increased cyclical fundamental risk and reduce exposure
to stocks.

No buy signal does not imply a market top but it does say to me that it is time to
activate strategy and tactics to reduce exposure to stocks because the secondary indicators I
use during these periods are far less reliable than the primary ones and because fundamental
risk will likely rise further. I should note that a goodly number of fund managers would not
agree with this approach, finding it too conservative.

I have added a link for the SPX Monthly Chart. It shows the SPX to be down on its 10 month
m/a, RSI and price momentum in downtrends, and most disquieting, a roll over to the down-
side for MACD. It may be too early to consider that roll - down in MACD a kiss of death.
The reason is that  the economic expansion does not yet exhibit the maturity in terms of
resource and capital utilization that would prompt such a perspective.

More On China Stocks -- Shanghai

First up, let's look at the monthly Shanghai for the longer run dating back to the mid - 1990s.
Shanghai Composite

In 1995, the Shanghai was in the area of 700. If you figure a 10% annual compound return, that
works out to about 4700 currently, which is just where the Shanghai is sitting. The issue here is that
China is no longer logging 10% growth and is struggling to achieve 7% annual growth. With a
forward look, the base at 4700 is too high for an economy with a pronounced decelerating growth
trend. The index has a large component of pure speculative interest.

Note also that the monthly RSI shows an overbought reading nearly right up there with the
bubble top of 2007. Now since China's book profits have grown significantly since then, the
p/e ratio on the market is considerably lower now than back during the bubble top, but even
so, this is not a cheap market as it was in mid - 2014 at the 2000 level. Note also that the very
high RSI readings up near 80 or above since the mid - '90s have served as good warning lights.

Now comes the weekly chart for the Shanghai. $SSEC The top panel of the chart compares the
Shanghai with the S&P SPDR index ETF for China. There is not a long history here, but the
$SSEC has tended to top out in relative strength against the GXC in the 50 - 55 area (the last
time was 2007).

China has a long history of domestic turmoil and is the graveyard of prognosticators. Apropos,
the US State Dep't and the CIA keep their fingers crossed for stability and hope for the best.
Now, with Mr. Xi trying to shift gears on economic and financial policy, China is going into one
of those times when its "social contract" -- its citizens tolerate  the the Party in exchange for
continuing prosperity -- may be tested for one of the few times in the past 35 years.

China Stock Market

I made a nice call on China stocks in Jun. 2014. The key premise was that a slowing economy
would lead the PBOC to ease monetary policy and re-liquify the system. I believe that longer
term, the Chinese have preferred to invest and speculate in real estate, and that the destruction
of the China stock bubble going into the 2008 - 2009 global recession only served to reinforce
the preference for real property. The weakness in the residential real estate market over the
past year was partly a result of tougher policy by official China in the real estate area, so when
China began to ease monetary policy in late 2014 and encourage equity investment, the change
in policies left real estate to languish and invited speculative spirits back into equities. This
was a pleasant surprise for the equity market since monetary policy has not been strongly
accomodative at all by China standards. So, net - net, mild easing plus changes in official policy
has lead to a windfall for stock players. GXC (With The Shanghai in the top panel).

It is interesting that the PBOC's change to ease has been moderate and controlled, for it is
likely not strong enough to trigger heavy speculative lending to business and real estate as
seen in the past. In this regard, since the new easier money policy has been slow to roll out,
improvement in China economic performance has been deferred until Half 2, 2015.

Over the years I have mentioned  that when The Shanghai is strong, the action can get wild
and undisciplined. The chart above, which features the S&P ETF of a broad index of investment
grade equities (GXC), looks tame in performance compared to the wild and wooly Shanghai
shown in the top panel of the chart. With the GXC there has been a  major tradeoff of volatility for
positive return against the Shanghai in a strongly positve market environment.

The GXC has been in bull mode since late 2011 and its pattern more resembles the SPX than the
Shanghai. The recent jump in price to $100 for the GXC brought it closer to its all - time high
of 113 set in the bubble high of late 2007. The stock has been correcting, but it remains mildly
extended and overbought. Earnings have progressed over the last seven years, so the stock is
much cheaper than it was at the peak in 2007.

It is good that China has embarked on controlled money and credit easing, and that from a
policy point of view, it is trying to encourage a larger, more liquid equities market. China has
also curbed its mercantilist impulse and seeks to diversify its economy away from excessive
emphasis on industrial development. I am hopeful that with slower growth the populace
can adjust its expectations calmly and will not require the authorities in Beijing to sop up
anger with nationalism and a round of regional imperialism.

SPX -- Daily

It was mentioned in a 6/10 post on the SPX that since the market held the shorter term shelf
of support at 2080, it might be worthwhile to see how it performed given widespread bearish
sentiment on both technical and fundamental grounds. The SPX has rallied enough off of
2080 support to turn the 25 day m/a positive, so it continues to require added attention given
the surprise move relative to sentiment. SPX

Key indicators of SPX behavior continue to show decelerating price momentum and recent
rallies that have tended to sputter out in mildly fitful fashion. Many strategists and other close
observers believe it is high time for a healthy correction. May be so, but it is also clear that
there exists a steadfast cadre of players who argue that the economy is progressing, that
weakness in SPX net per share is but temporary, and that a premium p/e ratio is well warranted
given prospects for a continuation of an extended period of low inflation and interest rates.
Newer players to the game may not be aware of the sway that this thesis of support for higher
and rising p/e ratios held in the market of the 1960s and very early 1970s. The view is often
encapsulated by the "Rule of 20", which claims that SPX p/e = 20 - the 12 month inflation
rate. With inflation very low and interests rates non - threatening, players who support this
idea see the market as reasonably priced.

I have issues with the "Rule of 20". Mostly, I am concerned that the rule should be based on
a longer view of inflation potential where there is considerably more room for debate than with
short run inflation measures.

Just know now that the "Rule of 20" is in vogue currently and has yet to be defeated by the
facts on the ground.

US Monetary Policy

Short Term Interest Rates
The classical cyclical economic case for raising short rates has weakened since latter 2014
with a more sluggish economy and awaits a return to stronger economic growth. Market rates
at the very short end of the curve are near record lows and support the Fed's ZIRP. With the
economy in its sixth year of recovery, capital slack in the system has been greatly reduced,
but there are presently no compelling imbalances in  resource utilization. The Fed has time
to watch for an improved economy before taking action.

Fed Generated Liquidity
The tapering and close out processes for QE 3 have adversely affected economic growth
and stock market progress in 2015. Since the Fed has not acknowledged these developments,
it is hard to say how aware policymakers are of the connection. I suspect it has been discussed
within the Fed and has made a few members of the FOMC more cautious about raising rates.

 The Fed has let over $35 bil. of assets run off Its books in recent months. This may have
bothered Treasury and stock market players some, and the Fed may allow some further modest
run - off. However, since seasonal system liquidity needs will firm up after the summer, it
may well be that the Fed will add back as much as $50 bil. to its book by this autumn. If so,
the markets may like that.

SPX -- Daily

The SPX rallied sharply today off 2080 shorter term resistance. Since so many players have
recently been looking for a price correction of substance, it might be wise to see how this
bounce plays out over the next few days. SPX

The key to extending the pop in the SPX is whether the market can break above the 25 day
m/a followed by enough forward power to turn the "25" higher. Such action would no doubt
change a few minds among the consensus that the market should erode further to test
support at the Mar. low of SPX 2040.

Note however, that the rallies so far this year have been losing momentum.

Long Treasury Bond

I turned bearish on the long -T around mid - Feb. of this year largely on technical grounds.
The TLT was above 130 at the time and very overbought. It is now at about 117.5 and the
overbought has vanished. TLT

The fundamentals I use to get a good sense of direction for the bond market have eroded only
slightly and current data are insufficient to signal a clear bearish reversal. I conclude that not
only was the market overbought earlier in the year, but that weakness in TLT likely also
reflects expectations that future inflation will strengthen and that the Fed has it strongly in
mind to raise benchmark short term interest rates over the next six to nine months. The sharp
weakness in the TLT price seen since Feb. of 2015 may also involve trader worry over liquidity
in the market once it becomes more apparent the Fed is finally getting ready to pull the trigger
on rates.

From mid - 2012 through late 2013, TLT fell in price from above 120 down to the 97 - 98
area all on expectations that the Fed would end QE 3 and raise short rates. Bond pricing
fundamentals remained positive over this entire period, and when traders realized their fears
were not going to be realized, they took the bond up from the high 90s to above 135 early
this year. The moral here is that we need to say a sustainable step in economic growth
with enough momentum to bring additional pricing pressure and firmer credit demand before
it can be stated with confidence that T - bond price fundamentals have made a decisive
cyclical turn for the worse.