SPX -- Weekly

Fundamentals
My weekly cyclical fundamental indicators have been on the flat side since the end of Jan. Since
they are forward looking, there is a suggestion that the Apr. - Aug. period of this year could see a
slowdown in the progress of business sales and profits momentum. The SPX has tracked the
indicator well since Jan. 2016, so a flat market could continue for a while. On the plus side, there
are some preliminary indications the recent thrust upward of  the y/y CPI may dampen before
long and perhaps take some of the pressure off the Fed to hike rates quickly.

Trump / GOP Opera Buffa
The American Health Care Plan blunder revealed advanced buffoonery in both the White House
and in the Congress. This first disastrous try at serious policy making should, in my view, knock
200 points off the SPX forthwith. But, for all I know, The Street may well try to put a more
positive spin on this serio - comedy to keep up interest in the pro - business tax and infrastructure
programs still on the docket. The alleged dalliance of Team Trump with Russians to undermine
the recent election and, perhaps, to reset  US foreign policy to a more kindly stance toward
Mother Russia is now a brisk double dumpster fire that still requires attention.

Technicals
The SPX is in the midst of working off an intermediate term overbought condition. The post -
election rally has been very resilient, but with some slowing of profits growth out ahead and
the recent AHCA fiasco set to prompt at least a little shiver, you might keep in mind that
longer view trend support is at SPX 2200 - 2250.  SPX Weekly

Oil Price

Back on Feb. 5, I posted that the oil price was subject to a hit to the downside. The 52 wk
price momentum had assumed parabolic proportions in relatively short order and speculative
long positions in the futures market had reached record levels. Too much was riding on a
continuation of a sharp rise in the price.  Oil Price

Price momentum has come way down and the grandly elevated speculative long position has
been partly unwound. the uptrend in the oil price since early 2016 has been broken. The price
is now veering toward an intermediate term oversold but has room to head lower before it
reaches that level. Oil has remained in the $40 - 60 bbl. consensus range and there is near term
support down at roughly $44.

Oil demand has firmed as expected, but production has been larger than earlier consensus had
it as others ex the OPEC core production cutters boosted output, including the US. So, the
market is not yet in balance on supply / demand and oversized inventories of crude have moved
higher. The financial damage to the industry from the 2014 - early 2016 price bust was not
sufficient to wipe out much marginal production, and the Saudis will have to keep that in mind
in deciding whether to hold back OPEC output beyond the Jun. 30 termination of the current
production cutting deal. It might be wise to wait and extend the deal to see if rising demand
picks up what is now a small surplus in daily output before going 'nuclear' again.

With a strong bullish case now more elusive in the near term, I would not mind seeing the
still large speculative long position in the futures market unwound further before showing
further interest.

SPX -- Weekly

This cyclical bull is currently still trading at a major 3 - 6 month (intermediate term) overbought.
The SPX is near its recent all time high, but positive momentum has stalled in recent weeks and
the uptrend line off the post-election rally has been violated. But, there is not enough evidence to
argue that the rally has ended yet. On the fundamental side, my forward looking cyclical weekly
indicators have also flattened out. With the Fed in tightening mode, market players are watching
weekly and monthly indicators carefully. Monthly business sales have lifted nicely and profits
data is improving but other core measures of economic health such as industrial production, the
real wage and 12 month civilian employment growth are far less imposing. By the same token,
the slow pace of broad economic growth still leaves expansion potential ahead. My business
strength index stands at a mild 133 with economic overheat set well above at 140. Overall, there
is 'room' for another pronounced slowdown in the weekly cyclical data set which could trouble
the market, but there is enough slack to warrant the suggestion that any sharp slowing in the flow
of short term data may be followed out in time by yet another cyclical upswing. SPX  Weekly

With the growth fluctuations in a lengthy but slow economic expansion still leaving slack to
be taken up eventually, and, with the Trump stimulus programs still to be fought over, it is not
hard to understand the now popular idea to stick with a high equities allocation and not bother
with market timing. I am too much of a trader to be comfortable with such reasoning.

 

Economic Growth Momentum, Stocks & Bonds

Since the US economic recovery began in 2009, there have been three intervals when weekly and
monthly economic momentum data have surged: early 2009 - early 2011, early 2013 - late 2014,
and mid 2016 to the present. During much of the 'surge' periods, stocks have performed very well
and the Long Treasuries has been trashed. Noteworthy now is that weekly and monthly momentum
data have been running strong for an extended period and may be set to slow down over the Apr. -
Aug. 2017 period. Looking at recent markets performance, there has been a dramatic 'rotation' out
of the long bond and into stocks. SPY:$USB

With the Fed moving very slow to lift still nominal short rates and with some inflation harbingers
such as industrial commodities (including crude oil) having lost positive price momentum, the
possibility of a temporary but significant reversal in the relative strength ratio of stocks to bonds
cannot be blithely dispatched.

The long term trends for both economic growth and inflation are in pronounced down sweeps and
until the time comes when we can say with some conviction the economy has moved from being
price stability prone or even, gulp, deflation prone, back on to inflationary turf, bonds should not
be as richly ridiculed as they are currently.

Perhaps the Trump / GOP stimulus plans that remain on the docket will settle the question and
one can bid adieu to bonds for a good while. That is the current mantra in the markets. More
and more folks are now saying stocks are in a new secular bull market and not just a cyclical advance.

Keep a couple of things in mind. Through most of the economic recovery / expansion stocks
and bonds have been exceptionally sensitive to shorter run changes to economic momentum,
and also note that even though the GOP controls both ends of Pennsylvania Ave., progress
on the agenda has been halting at best.

Stock Market Profile

Cyclical bull market... Buttressed by a year of improving business fundamentals, low interest rates, still modest inflation...However, the market is heavily overbought for the 3-6 month term and is hyper extended especially for the long run...It is expensive on valuation and is facing an increasing headwind from decelerating liquidity growth.

The pace of the advance in such key weekly data as sensitive materials prices and the rate of
decline in initial unemployment insurance claims have been impressive over the past year.
The same may be said for the PMI new order data. Some slowing  in the progress of these
weekly / monthly indicators may be expected over the next few months, and this probably
will not escape investor notice.

Industrial production has been quiescent over the past year but appears set to accelerate in
response to strong new order numbers. Stronger IP will power up business profits but will add
to inflation and could well lead the Fed to take more aggressive action with short term rates. Such
developments could put upward pressure on bond yields and will lead some market players to
reassess their comfort level with the markets p/e ratio.

The market is now trading about 20x estimated 12 month earnings through Q1 '17. That is on the
high side of history and may not sit well as rising production adds cyclical pressure.

The Fed has been curbing the growth of its balance sheet and much stronger total business sales
is eating into the excess liquidity provided by the private sector. The liquidity picture is not yet
a negative for stocks but is darkening. Here too, rising production may play a role.

I am posting the weekly chart of the SPX early because it best reveals the heavily overbought
environment we are passing through. Overbought markets surely can get even more so, but we
are well along here and a loss of the strong momentum of recent months may not sit well.
Weekly SPX

SPX -- Daily

Buy side trading discipline has been cast to the wind and indicators warning of a substantial
short term overbought condition in the market have been waived off. Market timing is out
and chasing them up is in. There is as yet no economic growth  visibility past mid - year, 2017
and all the Trump / GOP Congress programs are being nudged further into the future and
worse, are laced with fallacious "single entry bookkeeping" by the Street and various analysts.
there is a lot of heavy political and logical thought lifting to be done in the months ahead.
SPX Daily