US Stock Market -- Some Thoughts

Correction In Place
The SPX fell about 12% from its peak before recovering substantial ground later in the week.
Peak to trough so far, the SPX fell to a sharp and trade worthy oversold of 6.2% against the
25 day m/a earlier in the past week but has bounced to a moderate short term oversold of 3.2%.
It is an open question of how serious the correction is. The SPX has fallen below its 200 day m/a
and the 200 day has rolled over for the first time since 2011. Moreover, like the deep 2011 price
decline, both the RSI and MACD measures have been trending down for several months as lead-ins.
On the plus side, all the sharper down moves in the SPX since the 2011 correction have seen 'spike
low' patterns where recovery has been fairly rapid and where new highs were attained. SPX Daily

Room For Another And Perhaps Final Leg Up?
The cyclical bull is six years old, but there are capital resources -- idle capacity, labor, and credit
availability -- which remain untapped or underutilized and which are sufficient to carry economic
expansion into 2017 if exploited. Bull markets normally do not end until the economy is overheated.

But, to get this last up leg in the market, the economy must continue to transition to a credit driven
expansion which is far less reliant on continued growth of monetary liquidity. The failure of the
stock market to sustain the new highs in 2015, as modest as they were, means there are plenty of
second thoughts among investors concerning whether it is advisable to pay premium p/e ratios
for US stocks in an environment that may be more risky on a global basis (It could be argued that
risks are no higher than they were months ago, but that many players, smitten with the idea of
sustaining high valuations because inflation is so low, have taken off their blinders and have
broadened their focus).

As it stands now, I would be very reluctant to deny another up leg which carries the SPX to new
historic highs. On the face of it, such a continuation of the bull would seem to be modest in
potential. With accomodative monetary policy nearly global in scope now, and with China
especially set to push hard for faster economic growth, US stocks may get strong competition
from foreign markets, oil and other commodities. One offset could be if bondholders, seeing
that the Fed intends to raise short rates gradually but with persistence, elect to trim long dated
maturities and move some of these very large funds into equities.