SPX -- Monthly

Technical
The longer term monthly SPX chart captures the strong move to the upside since earlier in the
year, but the indicators show a negative bias for the SPX since early 2015 and in the wake of the
ending of QE 3. SPX Monthly

The sharp rollover in the MACD toward the start of 2015 compares to similar reversals in both
the years 2000 and 2007 which heralded the eventual onset of strong cyclical bear markets. But,
unlike those two prior periods, the SPX has resisted capitulation as evidenced by the more shallow
negative performance of the relative strength and price momentum indicators.

Fundamental
Since late 2014, SPX net per share has fallen from roughly $115. down to $101. through year end
2015, and this downtrend remains in force. On balance, earnings have been penalized by the
sharp drops in oil and gas prices and by the poor performance of export sales. However, the broad
economy has continued to expand, although momentum has slackened substantially. Without
evidence yet that a recession could be underway soon, investors have been reluctant to dump
stocks in a wholesale fashion. As reinforcement, players know that even a lowly 2.2% dividend
yield compares favorably to cash equivalent and even to the ten year Treasury at 1.8%. Getting
fancier, there is a 4.9% earnings yield on the SPX which tops high quality corporate bonds sitting
at 3.5%. The p/e ratio on the market exceeds 20x recent earnings. This is a generous valuation,
even allowing the modern idea that low inflation entitles players to reduce hurdle rate
expectations.

Clearly though, investors are counting on an eventual sharp recovery of earnings power which
may be sufficient to offset short rate increases the Fed may envision in its gradualist approach
to tightening monetary policy in the years ahead. The price for players to stay in the game
remains formidable.