Stock Market update -- Fundamentals

The US economy is showing numerous preliminary signs that a slowdown is dawning. As well,
the various leading eco. indicators have been losing positive momentum since early this year
and this steady trend signals a slowdown of growth ahead. My analysis finds nothing serious
yet and I conclude it is premature to talk about a recession. But there maybe a pronounced
downturn in the expansion ahead and critical as always will be inventory management by all
levels of business. The supply management software is there to provide comprehensive and
timely inventory data right down to mom/pop businesses. What I watch in the short run is
inventory to sales data and any signs there may be inventory speculation underway. With
inflation still modest and with short rates even for prime borrowers now running at least 2%,
there is sufficient reason avoid speculation and manage working capital carefully. 'Wolf at the
door' recession scenarios do not seem appropriate at this time.

However, a pronounced economic slowdown will have an adverse impact on profit estimates
and I think the market has already started the process of discounting more modest growth in
business profits as the US appears set to join a global slowdown.

Whether the recent stock market correction is sufficient to allay most fears is hard to say, but
it is tougher to expect strong and sustainable price rallies when market players are concerned
the longer term direction of profits growth momentum may be more sluggish than recently
thought likely.

The Fed is coming under increasing and substantial pressure to slow or even halt its policy of
tightening credit via hikes in short rates. If the Fed succumbs to the pressure, it may trigger a
'relief' up leg in stocks, but such an event will only serve to complicate the Fed's job later on
when a final stage economic expansion may develop. You also need to keep in mind that the
Fed still seems intent on shrinking financial liquidity via downsizing its balance sheet.
So far, the possible deflationary impact on p/e ratios from this  era of liquidity tightening has
been displaced by large fiscal stimulus and deficit budget financing. but without additional fiscal
loosening measures, the quantitative tightening under way will re-assert itself with probable
negative effects for the various forms of risk capital to occur down the road.

A heavy duty trade war with China will be broadly economically destructive. Let us hope that
the principals can finesse the situation, but I suggest you keep in mind that neither Xi or The
Donald are the sharpest knives in the drawer by any stretch.

Stock Market Update -- SPX Chart

I'll tackle the fundamentals later in the week, but let's look at the chart first.  SPX Weekly

The market just closed a touch above the long term trend line going back to 2009. So, it is still a
cyclical bull of long duration. However, the important trend up from early 2016 has been
broken, and that uptrend marked the third wave up for the market since 2009. So, by my
reckoning, it remains to be seen whether the bull may soon run out of gas or whether there is
some sort of bonus round up in store.

Note that the 40wk. m/a of the SPX has recently turned down for the first time since the second
half of 2015. There can be sudden whipsaws here, but a downward shift in the 40wk. m/a often
signals further weakness lies ahead even if it is not especially dramatic. The market is oversold in
the short run, and sentiment is rather bearish. So, there could be a bounce ahead, and looking at
the stochastic in the top panel, there is reason for optimism in that positive turns in this measure
after it reaches a low point often do signal a bounce. Naturally, there can be a whipsaw here, too.

There are still plenty of players out there who do not see a cyclical top in this market until some
time next year. To accomplish this, the negative downtrends in SPX momentum since earlier this
year, as captured by the MACD and KST measures in the bottom two channels of the chart,
would have to reverse in a significant positive fashion. Now, to be fair to the bears out there, it is
worth saying that intermediate downtrends in price momentum measures often presage actual
further price corrections in the market.

I have said in the recent past that this has been a lovely ride up from the depths of 2009, and that
this market really does not owe us anything now, given how close we were to true economic
disaster or Armageddon over 2008-09. So, for now I am content to see the SPX trade in a range
of  2600-2850, and I would be delighted if we can make it through 2020 at SPX 2500.