SPX -- Monthly

The bull market continues, but with a tough first quarter of 2018, the market is barely holding its
uptrend. Moreover, for the first time since late 2014, the longer term momentum indicator (MACD)
has turned down. This indicator can whipsaw in the months ahead, but the downturn is bearish
for now. Note as well that there has been no negative cross in the MACD yet, so that there is no
confirmation of a downtrend ahead.  SPX Monthly

My weekly cyclical fundamental indicator has been in an uptrend since early 2016. It has turned
sloppy during Q1, but is not headed down fast enough to cause much concern. The US economy
may be peaking in terms of growth momentum and this suggests we may see some slowing of
top line sales growth ahead as well as some pressure on pretax profit margins. On the plus
side, the business sector will benefit from a lower tax rate and earnings should continue growing.
The Fed has turned more restrictive in policy. It is shrinking its balance sheet and the monetary
base has flattened out as well. Bank asset growth is modest relative to economic momentum so
that, in all, there is insufficient liquidity growth in the system to support rising stock prices. This
leaves the market dependent on share buybacks by companies and foreign inflows from offshore
investors. With short rates rising, there is a challenge ahead for the SPX p/e multiple. On the
plus side a cyclical advance underway in  inflation has been strikingly humble. You can also
watch to see if equities might benefit from rotation out of bonds if inflation perks up a little more.
In all, thin porridge for the bulls.

SPX -- Quickie

News that the US and China were exploring a trade agreement behind the scene triggered off a
relief rally today, with the SPX rallying off the 200 day m/a trend support. Traders also liked the
double bottom on closing lows.   SPX Daily

We will just have to see whether the two parties can up with a suitable compromise. In the mean-
time you can watch to see if the SPX can rally enough to reverse downtrends in the 25 day ma, and
the RSI, MACD and trend indicators. You need to take care here because the first attempt to 'buy
the dip' in early Feb. did not work, with this indicating a loss of the level of high confidence we
saw throughout last year and into Jan. of '18.

SPX -- Weekly

Back in late Jan. '18, I argued that the SPX had carried up to such a large premium to its 40 wk. m/a
that history showed there was but in a 1 in 4 chance it would trend significantly higher over the
next six odd months or so. Since then, it has gone into corrective mode and, based on the RSI and
stochastic measures, it has fallen from heavy overbought down to neutral. The market is again
testing its 40 wk. m/a, and all of the premium has gone out of it. Momentum, based on the MACD
reading, is still elevated but is now negative as it trends down. The SPX is now sitting right at
longer term trend support and a further sharp downward break would signal a termination of the
advance at least until a new base at lower levels could be established.  SPX Weekly

That the market did not break down last week but exited as a cliffhanger instead suggests the bulls
are trying to buy time to see if investors now think rising short rates and a protectionist trade action
between the major economic powers -- the US and China -- cloud the outlook sufficiently to
warrant further price erosion. Restrictive trade action so far is mild enough that the market should
not worry, but we do not know if further actions could come along to create more substantial and
palpable risk. I know what should happen between the US and China on this subject, but what is
likely to happen is the obvious critical thing. It will be very interesting to see if traders are
confident next week to rally the market based on the current prospect of only modest economic
damage.

 

March Overview

The best guess here is that the US economy is experiencing an interim momentum peak with a
mild and short lived slowdown to follow. This peaking process will be the third one since the
economy began to recover from its deeply recessed base back in 2009. My indicators and
observations of inventory levels now suggest the slowdown will not be as long or as steep as they
were following interim peaks in 2011 and 2014. Business profits and real disposable incomes are
benefiting from the large tax cuts recently enacted and slowdowns here will likely be far less
pronounced. With the quantitative tightening of monetary liquidity (QT) having displaced QE,
the stock market will likely remain focused on economic momentum going forward so any
negative reaction in the stock market to a slowdown should be mild.

Trump's first round of protectionism  -- duties on imported steel and aluminum -- looks like it
may resolve into an old fashioned extortion program. the second wave may target China's large
export balance in the US and could be tougher and involve some nasty blow back from China.
This potential trade spat could shake stock market confidence more significantly.

The indicators still show no very substantial inflation potential ahead for the US. My longer
range indicators suggest a much stronger ramp up of inflation pressure, but this is yet to show
up.

I am expecting the Fed to continue to raise short rates in a temperate manner, but I think the
Fed could turn more aggressive later in the year if economic growth picks up again as I expect.

It will be instructive to see if the economic slowdown out ahead in the short run triggers a further
downswing in longer term Treasury yields.

As of now there seems to be little potential for the development of the kind of cyclical credit
squeeze  that normally pre-dates a recession. Liquidity growth is slowing, but short term credit
demand remains exceedingly mild still with worthy borrowers preferring the long end of the
market.

Bobby Three Sticks (Robert Mueller 111) continues to close in on Trump and as he does, there
may be further push back from The Donald. This could prove disconcerting to the markets if
some sort of judicial crisis emerges.

SPX -- Update

The up leg underway since early 2016 remains intact and provides trend support around 2600. The
upward acceleration in the SPX since the 2016 election has not broken in any decisive way, leaving
the SPX with a shot at regaining the highs set in Jan. The market is not at all stable, and if it is to
move higher, it needs to come up through the 25 day m/a with an up turn in the "25" to follow.
 SPX Daily

So far, the SPX is up around 1.7% on the year. It seems as if we have had year's worth of action
all rolled into a little more than two months' time. Most market strategists, although bullish on
the outlook for this year, also foresaw increased volatility as market players contend with the
expected combination of rising interest rates and profits coming along together. For most folks,
that scenario has not changed, nor has the consideration of an acceleration of inflation as the
economic expansion matures. In short, the thinking out there remains that events could lead to
occasional wobbles of the SPX p/e ratio. My fair value model suggests a single figure of SPX
2720 through mid-2019, which is where the market stands now.

There is concern that should Trump apply tariffs to both aluminum and steel imports, a larger
trade war could ensue. However, lets see if he is running a bluff first.

The lack of stability in the market at present calls for you to double check your convictions.