SPX -- Looking Ahead

Fundamentals
Total business sales have been ticking along at nearly 6.5% yr/yr. With reasonably strong
volumes and a price/ cost ratio fairly even, pretax margins have been advancing, and bottom lines
are enjoying the large extra kicker from the tax cuts. As well, inventories are being managed well
compared to other growth spurts during this long expansion period. Stock buybacks are surging,
providing extra fillips to net per share. But businesses are committing to higher levels of capital
spending as well, which will add to productive capacity in 2019 - 20.

Interest rates are in clear up trends across the board and do seem poised to go higher well into
next year as the Fed continues to tighten monetary policy. Inflation pressure is inching ahead and
there is no indication of a sharp acceleration of pricing as yet.

There may well be some slowdown in economic growth momentum as this year progresses, but
it may well be more modest than I originally expected if business inventories continue to grow
at a  moderate pace.

The earnings / price yield for SPX based on estimated net per share sits at 5.8% and is well above
the 91 day T-bill yield. This indicates that monetary policy is tightening only gradually and it may
not threaten the market near term.

Valuation
Despite reasonably attractive fundamentals, I have the SPX as no better than fairly valued looking
right into 2019. So, strong upside from current levels rests on the development of some sort of
speculative zeal for stocks as the economic / profits expansion matures and the Fed presses
onward in its bid to "normalize" rates.

Technicals
The SPX is struggling to regain sustainable positive momentum after coming off a generationally
strong overbought condition brought on by the big wave up over the latter part of last year. I
would like to think the SPX is set for a shot at the former highs over the next couple of months,
but I do not think it unreasonable to look for the market to complete a deeper correction that
would bring it to a more solid intermediate term bottom.

SPX Daily

SPX -- Weekly

The historic and obvious overbought we saw at the end of Jan. '18 has corrected down to neutral.
The prospect of a significant increase in earning power is being realized via the large fiscal stimulus
programs enacted by the force of Trump / GOP. However, there is no evidence yet that it will add
to business sales or top line growth going forward. The Fed appears on track to tighten money
further as it shrinks its balance sheet and the monetary base and  promises to keep on raising short
term rates in a gradual fashion. Some Trump influence downside is being felt. The US is taking a
hard line with China on trade and is now threatening Iran that it may walk away from the nuclear
deal and perhaps re-impose sanctions that could boost the oil price further. And, even though the
Trump / Kim prospective summit is intriguing and may be positive, wrong turns could leave us
staring at additional saber rattling. As well, Trump and the far right of the GOP may be readying
to provoke a judicial if not a constitutional crisis over the Mueller investigation. Why, it has
almost become what we used to call a Thinking Man's market.

The bulls are left to put their heads down and plow forward. Longer term momentum measures
are rolling over, but the market has drifted from big time overbought down to neutral, is holding
support at SPX 2600, and is maintaining its uptrend off the 2016 low. There are no clear signs that
a recession lies nearby and the inflation rate is not threatening yet to take off higher. Moreover,
if you accept liberal valuation standards, the SPX is fairly valued.

SPX Weekly