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.