Stock Market

Fundamentals
The cyclical bull market that started in early 2009 remains in place. But, it is an uncomfortable time.
My forward looking weekly cyclical indicator has been nicely on the rise since Feb. '16, in line with
the current up leg of the market, but the customary positive follow through for the economy and
for profits suggested by the indicator has fallen far short, leaving the market to advance primarily
on a nominally rising dividend, yield premium to cash equivalent and Treasuries, and a very low
inflation rate. Players call this "TINA", short for "there is no alternative". The idea is that with the
Fed holding interest rates so low, there is not enough competition for stocks. So far since the
latest leg up started in Feb., the premium p/e ratio, hyper extended position of the current price
level, and stagnant earnings have increased anxiety but have not knocked the SPX off of its uptrend.

With Fed members talking about raising short rates before long, the rally has lost positive
momentum and players are also wondering about the outcome of the upcoming election as well.
Since my forward looking economic indicators are not working very well at this point, I am not
about to step out of character and start making market predictions. When some useful clues come
around, I'll reassess. The stock market does not owe us a thing at this point, but I hope the economy
owes us some stronger performance.

Technical
The SPX continues to work off the overbought levels hit this summer and the indicators show mild
deterioration.  SPX Weekly

Oil Market / Price

Sep. is one of the strongest months for the oil price on a seasonal basis. The rally fizzled again this
this year, with large speculators exiting trades. The scenario I have followed called for oil demand
and supply to come into balance by the end of 2017, despite likely outsized inventories. With a
slower pace of global economic growth so far in 2016, oil demand is running below initial
expectations, and with supply still growing at a high rate, the inventory pipeline is susceptible
to filling further. With a nod from the Saudis, talk is now swirling around the idea of some kind
of global production ceiling if not a cut. It could happen, but 50 years of history teaches to be
careful of this kind of talk in the wake of major price busts.

I played the long side of oil over the winter / spring of this year but have been suspicious since
mainly because of the near historic long side speculative interest in the crude future. Heavy long
side interest is subsiding quickly now, but it is back to the drawing board for me as there are
question marks concerning both global supply and demand looking out 12 months. Since the big
traders and hedgers in the market get more intelligence faster than the rest of us, one rule of
successful trading in oil comes to the fore: Oil is volatile, so do not bother trying to catch tops
or bottoms, but concentrate your research when trend develops instead. Whipsaws happen, but
since oil tends to trend, spotting change can be profitable even after its price direction has
begun to establish itself.

With the peak driving season in the northern hemisphere now wrapped up, oil is set to enter a
strong price downtrend on a seasonal basis.Thus, the large swirl of talk about limiting output as
another sharp downturn in price would add to the severe economic damage net oil producers
have already sustained. Stay focused on the news.

WTIC Weekly

SPX -- Daily

With a sharp, short time duration sell off early in the month followed by a fast double bottom
just above the SPX 2125 level, the market is attempting to rally off a moderate price momentum
oversold condition. A rise in short rates has been pushed further out in time, so stocks and bonds
have some breathing room to the upside. If you are long the stock market, next you will want to
see if any further progress is sufficient to reverse the downtrends in SPX RSI and MACD.
SPX Daily

Monetary Policy

Despite intimations from Fedspeak that an increase in short term interest rates is in the pipeline,
recent economic data through mid - Sep. turned weak and left the Fed having to again postpone
further tightening of policy. This being a national election year, the incumbent party wants to
show economic data at its best right before the vote, so a snap back in Sep. data to be released
next month cannot be ruled out. If that is not feasible and weakness continues through the
month, the GOP could win the presidency and trigger off a wide range of interesting discussions
about the economy after election day.

Be that as it may, the classic case for tightening monetary policy further is not in place, and we
have to wait and see whether incoming economic data released next month improves. If such is   
the case, then after election day the Fed will have a freer hand with policy.

Long Treasury Price (TLT)

Back on Jun. 20, I argued that the long Treasury price was steaming along up to a major overbought.
With long Treas. yields still near all-time lows, prices are still near highs. Years out and looking back,
these price levels will very well likely be in the top tier of the long term range. Positive sentiment is
still fairly strong, so it could be a stretch to say that the latest run up in TLT from the spring until
recently was a blow off top.  TLT

The recent volatility in the bond market appears to be fueled more by expectation than short term
on-the-ground fundamentals. Whatever the Fed does this week with short rates, Fedspeak wants
to keep the issue of eventually raising short rates in the headlines. Players may also be looking
toward 2017 when a slow economy may lead a new president to push for significant fiscal stimulus.
This election year has introduced the political elites to the fact that the silent, primarily white,
majority is angry, vocal and demanding. These folks are leaning in hard on people and programs
which might make their economic lot better and more secure. This all could translate into
incremental deficit financing at the federal level starting next year. Infrastructure repair and
development programs coupled with tax relief and other stimulative measures, if large enough in
scope, could foster somewhat faster real growth, stronger inflation and a larger Treasury bond
calendar. In such an environment, the Fed would support higher higher rates and further upward
pressure on bond yields would ensue.

Now, the hard truth is that the bond market is not comfortable looking out even this far, but with
nearly everyone suspecting that yields are at or near all-time lows, and armed with the additional
knowledge that so many folks are pressing for better and more financially secure times, it is not
unrealistic to think that bond players are looking out past the ends of their noses.

If so, the bond market could be tougher to 'read' than usual in the short run and there could also
be more volatility as a result.

SPX -- Weekly

Technical
The SPX has weakened recently, but is still holding an uptrend from this Feb. based on weekly and
daily closing prices. An intermediate term overbought condition is being relieved and the break in
the MACD pattern should be source of concern, although whipsaws do happen. The market is
still supported by a rising 40 wk. m/a, but note the loss of positive momentum. The volatility index
(VIX, bottom panel) is trending up but is not at a threatening level by long term standards.
SPX Weekly

Fundamentals
Conflicting Fedspeak has whipped the market around. The FOMC meets shortly and Their trial
balloons suggest the market would not take kindly to a rate hike, especially with weakness in
recent key economic data such as the readings for the PMI's and retails sales. The fundamental
case for hiking rates does not exist, but the Fed faces push back nonetheless.

Trump's reminder that he plans to remove Janet Yellen from the chairmanship of the Fed if he is
elected does not seem of great concern to the market right now, but the type of cavalier criticisms
of Yellen he has offered would sow uncertainty and confusion in the markets if he becomes
president and plays this type of game.

SPX -- Daily

For the past month or so the argument embedded in my equity market posts has been that the market
was overbought. Since more voices were added to 'Fedspeak' in favor of raising short rates this week,
corrective action in the stock market was taken today. Louder 'Fedspeak' has cast a chill since the
most recent reports of economic activity have shown a softening with sudden, across the board
weakness in PMI new orders data reported. The new Fed concern is that continuation of super low
short rates may contribute to capital markets instability. So, the Fed may be about to create some of
the feared instability off its own bat! Whatever, the markets were taken by surprise, with the SPX
dropping sharply.  SPX Daily

In one fell swoop, the SPX has entered mildly oversold territory on a short run basis. With the
sudden advent of trader crankiness, all the profit takers may not have unloaded yet. Of interest
is that the uptrend line from the Feb. low is at about 2110 and a break below that line of support
could trigger more concerns in the market.
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My strategy with stocks has been only to go long on deep oversolds such as occurred last autumn
and earlier this year. Viewed longer term, the market is once again hyper-extended and overvalued.

There is another personally troubling aspect about the market as well. Stocks are attractive when
the market is priced to return 10% (including dividends) annually over the long term. With a
slow economic growth environment, best I can figure is that stocks are priced to provide only a
6% long term return which presents an an unsatisfactory picture for risk capital.

Gold Price

Back on Jul.10, I argued that the gold price was overbought on an intermediate term basis and
that speculative long side interest in the futures market had reached record levels. Gold did
sell off in uneven fashion through the end of Aug., but has recovered sharply and partially this
month as traders view further Fed tightening and prospects for a another  bounce in the dollar
as now on hold.  $Gold

Gold has been choppy over the past two months, but has managed to hold its uptrend since early
this year. The chart shows that $1375 is the new resistance level. The market has lost only a
portion of its overbought status and speculative long side interest remains zealous although it has
eased somewhat. The cyclical case for gold remains but wanly positive. In the meantime, traders
are focused on the Fed and the short term outlook for the US dollar. Tough to make a call here.

Here is a link to the Jul. 10 post: Gold, Silver Overbought

Stock Market

Market Breadth
In terms of advance / decline. the market has enjoyed a very strong positive move since the winter.
However, breadth has moved into an overbought position currently when measured in terms of RSI
and against its 40 wk. m/a.  $NYAD Weekly - Cumulative

Notice that in recent years, when breadth RSI gets into overbought territory, as it is currently, both
breadth and  prices tend eventually to get choppy and show some vulnerability (RSI is the third
panel on the chart). Note as well the commanding premium the a/d line now has over its 40 wk. m/a.,
and the commanding slope of the a/d line itself. The trajectory of the a/d line has carried long enough
to be bullish for the intermediate term. It signals a strong impulse, but is now quite extended. The
MACD measure, which has nicely underscored the market's advance since Feb. is also now tending
to flatten.

Selling Pressure
A rising TRIN measure signals the volume of declining stocks exceeds that of advances. By this
indicator, the market is coming off an intermediate term overbought, but the trend of the TRIN
indicator has not as yer reversed to show development of  a weakening market.  $TRIN

As always, remember that an overbought market reserves the right to get even more so.