SPX -- Monthly

In posts on Feb. 27, and April 3, I called attention to the rollover of MACD on the SPX monthly
chart and how prior flops in this measure over the past 20 years presaged trouble for the stock
market. The rollover of MACD occurred as the first quarter of 2015 unfolded, and the SPX has
yet to recapture the 2100 level seen earlier in the year. SPX Monthly

My concern over the past year has been that on the rare occasions when very large QE programs
are brought to an end by the Fed, the stock market has suffered, and on most occasions, the economy
has as well. Point - to -  point, the SPX has been on the flat side this year, and the momentum of
business sales and earnings have eroded, with SPX net per share having gone mildly negative.

Because of the erosion of business sales and consequential profit margin pressure, one cannot say
yet with confidence that the economy has escaped this first round of strong tightening in monetary
policy and is readying to expand at a moderate pace. True, the evidence from the GDP accounts
reveals that real final demand growth has been sustained, with the volatility in performance heavily
reflecting a mild inventory accumulation / dis - accumulation cycle prompted by harsh winter
weather, the continuing effects of a strong dollar on export sales, and builds in hydrocarbon supplies.
What is troubling, however, has been the persistent decay in monthly economic data, with subdued
production and sales growth trumping reasonably good jobs and real income growth. But, so long as
jobs growth does not slow too quickly in the months ahead, the economy may be able to regain
better balance.

I outlined a mini economic and profits forecast back on Sep. 27, in which I posited that the US
economy and profits should improve. However, because the p/e on the market remains elevated,
I wonder whether the market has strong and sustainable upside from the current SPX level of 
around 2080 and whether, as the monthly chart shows, we may have already hit the peak in
the strong MACD progression in evidence over 2012 - 2014. This may be a conservative view,
but it is where the battery of indicators I work with leave me.

SPX -- Weekly

Fundamentals
The SPX is on the verge of an intermediate term buy signal, but there are issues. The market is getting
overbought short term, the Fed has a policy meeting this week, and we are about to enter a "bring on
the clowns" period in the nation's capital where spending bills are on the line, the US debt ceiling must
be raised, and where Speaker Of The House (Paul Ryan) faces his baptism. Upcoming as well, are
a bevy of PMI reports on business activity spanning the globe and info on China's new five year plan.
So, there could be some short run volatility to becloud the market outlook.

Technical
The market has responded positively and powerfully from the lows seen in Aug. and Sep. SPX weekly
The SPX has moved up and through its 13 and 40 wk. m/a's and although the trajectory is too sharp
to be sustained, the indicators are well below overbought levels when viewed over the intermediate
term (3 to 6 months). The signs do not of course preclude a disappointment but they are promising.

With the market having risen rapidly up to and through its 40 wk. m/a, my momentum oscillator is
about to turn positive from a deep oversold for the first time since the final quarter of 2011 ( I do
not show the oscillator on the chart, but it very closely resembles the MACD  which is displayed in
the first bottom panel of the chart). Looking back over more than 30 years of data, since whipsaws
in the signal come seldom when momentum is sharply depressed, the oscillator and the reversal of
the MACD should not be taken lightly. It is unfortunate that the MACD reversal has come only on
the heels of an already strong rally, which confirms the short run overbought in the market.

Stocks Rally -- Significant Test Ahead

With today's sharp rally, the SPX is fast becoming decidedly overbought on price momentum
with elevated RSI and MACD readings also ascending. Also of major short run importance is
the fact that the SPX is sitting right under the 200 day m/a. Failure to take out the "200" in short
order would normally be a good time for traders to take profits and may well have more
substantial negative consequences. Watch closely. SPX Daily

SPX -- Short Term

Deteriorating economic growth momentum and a weaker dollar has encouraged market players
to shift expectations of an eventual "lift off" in short term rates further out into the future and has
even prompted discussions about what options the Fed might have to ease monetary policy in a
in a ZIRP world. With bond yields so low and commodities and PMs remaining out of favor,
players have used a deeply oversold stock market to expand equities exposure. the deep oversold
condition has vanished, and with a variety of different concerns still nipping at portfolio managers'
heels, there has been a relatively strong but volatile rally from the Sep. '15 lows. SPX Daily

At present, the economic and profits outlook is rather subdued. A significant pickup in business
sales and earnings, should one occur, will bring the questions about when and how fast the Fed
might raise rates right back to the fore. In the meantime, players are again smitten with the "Rule
of 20" -- a valuation scheme that pegs the market's p/e ratio according to the rule that p/e = 20
minus the inflation rate. With inflation very low, adherents of the rule see upside in the market
even if profits growth is minimal. The "rule of 20" has been popular since the mid - 1960's and
is again filling in nicely in a slow growth, low inflation and interest rate environment. It is ok
to be leery of this type of thinking now, because it is a "thread the needle" argument in an
environment that lacks clarity and is risky in that the Fed has already tightened policy substantially
via shutting down QE a year back (the market is little changed from last autumn when the Fed
ended the QE program).

I have the market mildly overbought. It is trading below the 200 day m/a and to have reasonable
confidence that the current rally has staying power, the SPX needs to challenge the "200" before
too long and successfully break through it. I would also note that the VIX or volatility index
in the bottom panel has retreated maybe a little fast compared to the recent price action on the
chart.

Gold Rally

Gold has begun to fulfill my long held speculation that it could rally over Half '2, 2015. The
metal is on its way to a short term overbought on RSI and a rendezvous with the tripping point
resistance level up at $1200 oz. Gold Price

For more on gold fundamentals, scroll down to the 9/30 post.

SPX -- Weekly

Fundamentals
My primary fundamental indicator is still positive. The growth of monetary liquidity remains in a
downtrend but is not yet negative and short term interest rates have yet to reverse and go positive.
My weekly cyclical fundamental directional indicator has been flat now for a year. This indicates
a continuing economic slowdown and has likely bothered the stock market in the absence of further
QE which sheltered stock prices when it was in place.

Last week's strong rally reflects increased player conviction that an eventual rise in short term
interest rates has been pushed out further in time. The now weaker USD also lifts worry some over
the prospect for even stronger currency translation penalties to corporate sales and earnings.

The combination of global economic expansion and new evidence that excess productive capacity
is being shut in has not yet been strong enough of itself to put cyclical pressure on inflation, but a
weaker USD is lending some support to the oil price and selected other commodities. This factor
is relieving some investor anxiety about offshore economic and financial constraints attributed to
the sharp rise in the USD since mid - 2014. US equities players thus need to watch the direction of the
dollar more carefully than usual.

Technical
The near term weakness anticipated in the 9/26 weekly technical update proved very short lived.
A quickly ensuing rally eliminated much of the short term oversold position of the market and has
brought the SPX right up to occasional resistance at the 13 wk. m/a. SPX Weekly

The weekly SPX is close to a positive trend reversal if it can decisively take out the13 wk. m/a
soon. However, because it is short term overbought on a price momentum basis, an imminent
test of the downtrend in place is far from assured.

Tale Of The Tape: Stock Market

The Fed wisely put off raising the Fed Funds rate at its recent FOMC meeting. As a consequence, the
US$ has continued a modest downtrend, and this has sent mild risk - on signal to the markets. The
SPX has entered a correspondingly modest but volatile uptrend. SPX Daily

The 25 day m/a has turned up, and the VIX volatility or "fear" index has retreated from the late Aug.
spike up to 40 down through the technically important level to a more moderate 17.5 (bottom panel).
The market is now moderately overbought short term on a momentum basis at 3.1% above its 25
day m/a and in view of the spike in MACD. A fair number of traders would like to see another test
of the correction lows below 1880 given the extant volatility and the suspicion that even if the
market may strengthen later this year, the correction may need more time to run its course on a
seasonal basis. It hard to pound the table in opposition to this view. I am more interested in  how
the SPX will perform against its 200 day m/a when that day comes. This challenge may be a little
ways off, but when it comes it will be important, since failure to take out the "200" would be a
bearish signal.

Profits Indicators

My US corporate sales growth momentum indicator hit an interim peak of  7.1% yr/yr in Jul. 2014.
Since then it has declined to 1.1% yr/yr currently. The sharp loss of positive momentum reflects
slowing physical volume growth in general, a continuation of a deterioration in product / service
pricing power, a stronger US dollar (translation losses) and the sharp erosion of oil, gas and
sensitive materials pricing power. Note, as well, that global industrial output has slowed from
4% yr/yr down to 2% over the same period.

Normally, such a quick slide in sales growth would lead to substantial downside pressure on net
per share. SP 500 earnings have been declining from an annual rate of $117 per share to about $108
presently, but matters could have been much worse. However, the fall in oil and gas revenues and
in basic materials sales has resulted in significant cost reductions and profit margin improvement
for the many businesses that are net users of such products. Net users of oil, gas and basics manage
to generate 4% sales growth as a group and have seen improvement in selling price / cost ratios. On
top, a number of SP 500 companies have benefited from share buybacks.

Weekly and monthly leading economic indicators do not yet suggest a positive turnaround in SP
500 net per share, and the final calendar quarter estimate for 2015 now looks vulnerable. As posted
below on 9/27, I am expecting to see much improved business sales performance as the economy
moves through 2016 and as the substantial excess liquidity in the economy presently is turned into
higher transaction levels. The risk here remains the same as I have highlighted for a year, namely
that the economy must successfully transition away from dependence on QE liquidity to the ample
private sector internal and credit resources available to it already. The potential for stronger business
performance is surely there. Very soon, business will need to take a collective deep breath and have
the confidence to move on and up.