SPX Daily -- Setting The Stage Anew

The argument here for several years has been that when the Fed has turned off the spigots
following several years of massive inflation of its balance sheet and the monetary base, the
results are not happy for the economy and the stock market. There have been only a few
instances of this kind of activity, and based on over 100 years of history, the economy and the
market have not done badly so far, as private sector funding has been sufficient to keep a slow
recovery going as well as bids under the stock and bond markets. But, when the Fed does not
have our back with liquidity flow as now, it can be difficult for the stock market to advance
strongly and volatility can rise substantially. Note how the market has behaved since the end of
the QE programs in late 2014. SPX Daily

1. The Brexit sell - off has blown the 2016 rally out of the saddle and taken the market below
 short term support as well as the 200 day m/a.

2. The market is a significant 4% below its 25 day m/a, and is showing as oversold on the short
term RSI measure. That is enough damage to get at least a few traders interested in nibbling
long as might the very high volume.

3. The SPX is not yet close to hitting the kind of deep oversold that I think is most interesting in
a market without Fed liquidity backing and in a more volatile setting. Check out the MACD and
the momentum panels in the lower portion of the chart. This strategy would not suit many but I
have done well with it.

Gold -- Trading Up On Safe Haven Merits Now

Most of the favorable price action in gold for 2016 reflects a rather mild improvement in cyclical
fundamentals. For the short term, the fundamentals have faded slightly and now gold is advancing
on the Brexit news, with traders anticipating Brexit will trigger heightened uncertainty over the
global economic outlook and tack - on geopolitical instability in the EU with the perceived
possibility that other members, angered by the large influx of migrants to Europe, may look to
exit the union to gain greater sovereignty and get away from the gnomes in Brussels. Could be.
After all, years of weak local economies in the Eurozone, abetted by local austerity programs,
all coming in the wake of Europe's serious recession and God awful slow recovery, have had
withering effects on the political order in any number of localities. Hell, if a well established
democracy like the UK can have political upheavel, what can be said of the lesser lights?

The died-in-the-wool gold bugs are on the long side of the trade, but so are a bevy of momentum
traders and short term hedgers and this suggests that most of the players will need a steady diet
of bad news about economic and financial stability to re-inforce the long side order flow. I would
argue that with the world already six years into a slow and uneven economic recovery that the
odds favor negative surprises. But, without strong cyclical pro - inflation impulses in place, liking
gold as a safe haven only is a risky proposition. I would prefer to see a return of rising commodities
prices, a weaker US dollar and signs of faster global economic output growth in support of gold
than speculation about the effects of possible heightened political disorder. The latter is just too
tough to get a handle on to set strategy.

The weekly gold chart shows the metal is still in advance mode, has broken important resistance
at $1300 oz., has the support of a rising 40 wk. m/a and is again flirting with overbought territory.
Gold Weekly

SPX -- Weekly

Another rally above SPX 2100 was cut nastily short this week as the Brits voted by a modest
margin to exit the EU. Plainly, as the vote approached, players were zigging, blissfully unaware
that British voters were set to zag. In my view, the EU has been enough of a flop over the past
ten years that the Brits were warranted in no longer wanting to remain. But the timing of the
exit was bad as the EU, off its own bat, had not yet done enough damage to the UK to draw a
sizable majority of seething voters. The comparatively thin margin of 52 -48 plus the obvious
demographic divide of old vs. young captured in the vote is going to leave acidic recrimination
and contempt in its wake and it will put enormous pressure on England's righty old farts to show
clearly how Brexit will be a major blessing in disguise for the young. PM Cameron gets the 2016
Talleyrand Award, for he made not just a mistake, but a blunder instead.

It could easily take a few more days for both traders and investors to ransack the news to assess
whether the further unwinding of pro - remain bets will set off additional destabilization in the
markets and to come up with working assumptions about the after - effects of the vote for the
global economy and the markets in the months ahead.

It is worth noting that Friday's rout of the SPX stopped around 2016 support in the 2040 area.
SPX Weekly

The top panel of the chart shows the VIX or volatility index. A sharp rise in this measure often
reflects both instability and fear in the markets and a boost in the VIX above the 20 level
signals enough trader apprehension to warrant concern of more market price downside ahead.

Note also the MACD indicator. It is on the verge of the first negative "cross" since the rally
began in Feb.

The SPX has made powerful progress since its 666 low in Mar. 2009. It commands a p/e ratio
above 20x. It doesn't owe us anything. Gains from this level are gifts from the Gods and not
to be squandered.

You should show up on Monday to see if the bloodletting is complete.

Long Treasury -- Steaming Toward Overbought

US financial liquidity has been growing faster than the sluggish economy. Short rates remain at
nominal levels and the CPI has averaged less than 1.0% for months. So, bond market players,
both large and small, have been pushing the bond price ever higher with speculative interest
running very strong. The market is unsettled this week as traders await the Brexit vote on the
23rd. The bond price remains in a clear uptrend from the end of the Fed's QE program, although
momentum has moderated.  TLT

The TLT bond equivalent has recently broken out to new high ground, and a substantial inter -
mediate term overbought is developing. By long run parameters the Treasury market is vastly
overvalued, and further price progress hinges on a continued slow global economy with player
concerns occasionally heightened by real and contingent crises which could roil the world's
markets. Long Treasury investors are offered 2.5% currently to cover longer term interest rate
and inflation risk as well as future supply and currency risk. It would be presumptuous to say
that a top is right at hand, but history will eventually show that the market has entered a major
topping zone.

SPX -- Daily

Last week, I was guilty of damning the market with rather faint praise. Since, the SPX has rolled
over and has once again fallen through difficult resistance at 2100. The strong momentum of the
winter rally died out in mid - Apr. and a second but weaker wave up carried the SPX up into
early Jun. near 2120 before the trend connecting it with the Feb. low broke. The market has dipped
into slightly oversold territory and near term support for the SPX stands at 2040.  SPX Daily

No one thought the Fed would raise the FFR% at today's FOMC meeting, and with the economy
appearing to do better in this quarter and some modest improvement in business pricing power too,
fundamentals were not bearish, although the SPX remains indeed expensive.

More attention is being paid to the BREXIT issue. With no raft of economic positives to attend
an exit from the EU, and given some socio - political inertia, I would have thought the Brits
would opt to stay in, but the 'leave' crowd has apparently picked up some steam in surveys,
thereby tilting equities market players toward perceived safer havens.

As well, the oil price, which should be in a sharp seasonal downtrend in Jun. has started to waver
some, which in turn dampens the outlook for energy shares, a development bullish stock traders
now aver. For what it is worth, oil has actually held up pretty well so far.

Since my shorting days are over now that I progress further into my dotage, I have no interest
in taking a flyer on the stock market unless  a much deeper oversold condition comes along. It
has been my view that this is the way to own equities in this environment.

SPX -- Daily Chart

the consensus continues to build that the Fed will defer raising short rates for a while longer as
the US economy remains sluggish. Thus, the US dollar has been weak in Jun. so far and this has
worked to push the oil price and the commodities market higher. The continued strength in the
oil price leaves the market in a clear counter - seasonal advance. Presumption of a less restrictive
monetary policy by traders coupled with the still ongoing rally in oil are working to  push the
SPX higher and leaves it above the prior strong resistance line at 2100 and closing in on the
previous record high set last year in May.  SPX Daily

The SPX is expensive, is extended on a long term basis, and is backed by shorter run speculation
about monetary policy for the months just ahead. The rally off the Feb. 16 low is being extended
and the market is not yet flashing material overbought. Since sentiment has tended toward
bearish all year, players are hardly ecstatic. Still, you are on your own here, and if you're long,
review your risk tolerance.

One sneaky political point needs to be made as well. With the Obama administration in control
of much of the economic data flow here in this election year, the 'natural' tendency will be to
save the stronger readings until later in 2016 wherever there is discretionary leeway. Thus, if you
like the lower US dollar, it may have your back for a while longer.

SPX -- Weekly

Fundamentals
The weekly leading economic indicators have been suggesting a decent rebound in output this
spring, but the degree of positive response in the broad economy has been only slight so far.
Inventories are coming under control, but remain high. As well, the household survey of civilian
employment has flattened out in recent months despite an improvement in total business new order flow.
Plainly, as 2015 wore on, business geared up for stronger economic performance, and progress
has been very slow instead. Consumers have been lacking in inspiration and more company owners
and managers are uncomfortable in a sluggish global environment. Productivity has suffered as
companies are geared now for higher levels of business. The US plainly needs to pick up the pace
soon before a more lingering malaise develops.

Valuation
SPX return on equity at market (earnings yield) is running around 4.7% and the dividend yield is
about 2.2%. Thus, the SPX remains at a premium to cash equivalent and the 10 yr. Treasury, but
this is thin gruel especially since operating earnings remain under pressure and the p/e ratio on
last 12 months net per share is 21x. Investor patience, remarkably, has not yet worn that thin.

Technical
The market remains in an uptrend but has dropped into consolidation mode following the terrific
Feb. Apr. upside run. Short term support has now risen to SPX 2040. The market still correlates
well with the direction of the oil price this year, although now less so than earlier. Equities players
need to pay heed to the fact that June is a period of seasonal weakness for the price of oil (See
the WTI crude chart in bottom panel).

Once again, the SPX sits at the 2100 resistance level.  SPX Weekly

The Greatest....

I met Muhammad Ali in Chicago in the latter 1960s. He had already been stripped of his title,
and strongly rebuffed by whites for his objections to fighting in the Vietnam War, was camped
out in Hyde Park near both the University of Chicago and not far from the mosque led by Elijah
Muhammad, the dean of Islam in the US. I was a Phd candidate at U. of C and I was standing
on Kenwood Ave. with a colleague of mine. As he approached on the sidewalk, my friend, who
would go on to be president of a major west coast seminary and divinity school and was a gifted
orator even then, opened his arms and said in a crisp voice, "Hey champ...You know as far as
we're concerned you're still champ." We got the brilliant smile, saw the shoulders relax, and a
warm nod and hello. He was truly a larger than life guy. Tall, broad shouldered as you would
expect, handsome with flashing eyes. It was very tough for him then, but he gave us about twenty
minutes, ever gracious. We talked not about boxing but about the war and the great damage it
would do.

He liked the idea that just two white guys on the street knew his predicament in detail and welcomed
him anyway. We had notepads with us but never asked for an autograph. We shook hands and off
he went. These were good moments in what was to become a very difficult time for the US. And
through it all, Ali kept his dignity and eventually won back his championship and so much more.