SPX Monthly Chart -- Points Of Interest

Long Term "Progress"
By my way of thinking, the US has been in a bull market since 1982. Earnings and dividends have
progressed and with a deceleration of inflation and a lengthy downtrend of interest rates, the p/e
ratio has increased, especially over 1982 - 1993, as investors have bid down the discount or hurdle
rate required to find stocks attractive. The p/e multiple has held up despite more volatility of earnings
as companies have run more aggressive finance policies such as raising the earnings plowback rate,
buying in far more shares for the treasury, making many acquisitions using purchase accounting,
underfunding or eliminating pensions, and with the connivance of the accounting profession,
ruthlessly writing off their failures as "extraordinary items" instead of charging losses to operating
earnings. Most investors have applauded it all.

With decelerating inflation and globalization both making it tougher to generate pricing power,
companies have worked wonders slashing overheads and operating expenses. Investors have
welcomed this progress in increasing profitability. Investors who have called for a return of
profit margins back down to historical levels have been continuously frustrated.

 Most companies have increasingly focused on achieving investor pleasing short term results.
There are few very talented CEOs with the vision to grow their companies longer term, but
a goodly number of CEOs who have the ability to see around corners when it comes to their
own shorter run self interest.

What we have yet to learn of course is the price companies may have to pay for ignoring the
long run.

For good measure, and to keep the deflationary wolf from the door during this lengthy period
of "disinflation", the Fed has stood willing to provide copious amounts of liquidity when the
occasion required such.

On To the Chart
If you have been along for the ride, it has been good enough. Since year end 1993, SPX net
per share has increased by about 7.5% annually and the index has gained 7.7% per.
SPX Monthly

Looking at the chart and connecting the tops from 2010 and 2011, note that the market is
getting extended. Note also that the channel up from the low in late 2011 is not so extended.
If the latter channel stays in force and carries the day we will likely be moving into a giddier
blow off phase for awhile.

Watch the monthly chart as you go forward. The MACD over the past 20 years has provided
good guidance.If the blue line breaks below the brown one there may be trouble. Otherwise,
we may be OK. Note also the RSI trend which has been heading up since early 2009. A
break in that uptrend my also require your attention.

SPX -- Weekly

The Three Year Weekly Chart....
Since late 2011, the SPX has advanced relatively steadily in a low to high channel of 13%, and
has kept on a 20% average annual growth track. This performance has been reminiscent of the
spectacular 1995 - 1999 bubble run up although the current advance has been on a far more
moderate trajectory. If the SPX could sustain this strong pace through 2015, it would bring the
average up to 2500, a level well above what a very broadly positive consensus is forecasting.
Such an advance would bring the p/e ratio for the SPX to 20x, nearly double the level of
2011. There is non-bubble empirical support for another big year in that when inflation and
interest rates were low in the 1960 - 65 period during a period of stronger economic expansion,
the market did trade up toward the 20x level. Growth is not as rapid now, but interest rates and
the inflation rate are exceedingly low. SPX Weekly Chart

I think the major key behind the strong market advance in recent years has been the Fed's QE
programs both in prospect and in actuality. These programs have greatly boosted investor
confidence and have sustained a psychology of buying price dips, with all episodes seeing the
SPX go on to new highs. Note carefully on the chart though that price momentum has been
fading during 2014, in keeping I think with the progressive phase out of the large QE program.
Not only that, but players have become more defensive in stock selection and have stayed cool
on smaller cap, more traditionally volatile issues. With QE over since the early autumn, the SPX
has been trading more toward low end of the trend range in recent months.

Now, I do not pretend to have special insight on how well the market will perform in 2015.
Monetary liquidity growth is going to continue to decelerate through the year and excess
growth of liquidity relative to the needs of the real economy will likely continue to fade.
If the USD - Japan Yen relationship remains strong in favor of the dollar, there may be a
positive liquidity partial offset in the form of an expanding carry trade. As well, it might
come to pass that there will be a significant rotation out of bonds into stocks if the Fed opts
to push short rates up by 50 basis points or so as a further tightening trial.

I think players have bought the idea that some growth with low inflation and interest rates
gives them carte blanche to see how far they can push up the multiple. There is a large
degree of intoxication there. However, I also think the guys know they are playing with
fire in the game of extending the p/e multiple further. Just witness the fast, herd instinct
whipsaw action we have seen in recent months.

We can speculate happily on the potential for market return in the year ahead, but be sure to
recognize that  market risk has become sharply elevated as the US transitions more fully
away from powerful liquidity support at a time when investor confidence and enthusiasm are
running high.
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I have linked to a chart of the SPX which compares it to a 200 day m/a oscillator in green.
The chart shows a gradual deterioration of price momentum going back to the middle of
2013. This gradual downtrend in momentum is a bit unusual, but if it extends well into next
year, it would put the SPX on a more modest course relative to the 2011 - 2014 uptrend.

SPX vs. SPX relative to the 200 day m/a

Long Treasury Bond Yield

The long bond yield  has been in a steep downtrend since the early 1980s. When you roll in price
appreciation with interest earned (including of course the interest earned on coupon re-
investment), It has been one hell of a bull market. Noteworthy here is that there exists a five year
base under the yield downtrend at the 2.5 - 2.6 % area. The long T has approached this base
recently on a strong downtrend in yield from the outset of 2014.

Despite economic recovery in place since 2009, the yield has remained in a somewhat volatile
down trail primarily reflecting the deceleration of the inflation rate in the US since latter 2011,
and the Fed's policy of keeping short term interest rates near zero. Obviously, the large T-bond
purchases involved through the three QE programs have helped. TYX Weekly

We approach 2015 as follows. Inflation is still in a downtrend underscored by weak oil, sensitive
material and commodities prices. The Fed is maintaining its ZIRP on short rates for now, but
could elect to abandon ZIRP later in the year if the economy expands firmly and more dissention
flares up among members of the FOMC. The QE programs have ended although the Fed is still
committed to buying securities equal in value to those that run off.

With total financial system liquidity growth having rolled over on y/y % basis, it is reasonable
to assume the economy will lose significant growth momentum at some point soon, unless
confidence remains high and credit flows to the private sector move as needed. In that latter
case, the Fed will likely respond by aborting ZIRP and starting to raise the Fed funds rate.
That would be an important negative for the bond market as it would signal that the Fed
was committing to normalizing policy. The market may seek to cross this bridge ahead of the
Fed as it did in 2013, but we should also gauge carefully how the economy does on its new
liquidity deceleration diet.

If you click again on the chart link, I would point out that the T-bond yield has moved down a little
fast relative to its 40 wk m/a. This is a sign of an "overbought" market as is the  28% decline in
52 wk momentum as seen in the top panel. Wherever the yield goes through next year, it
has had a run that may be too good in the short term

Oil Price

The free fall in the oil price over H2 has created hundreds of experts on the future of its
price. The many forecasts for 2015 range from $20 - 85 bl. so I do not know how useful
all this newly minted expert testimony is since it covers most of the waterfront. What I do
know is that the closing weeks of the year is a time for brief seasonal strength in the price.
My argument has been that a failure to see either a stabilization in price or a rally as the
year draws to a close might spell further significant downside as 2015 unfolds.

My view has been that the best place to be regarding the oil price is on the sidelines. The minor
price bounce this week has hardly been imposing and, another weak seasonal round is ahead
for the Jan. - Feb. period as refineries gauge what might be desirable gasoline blends for
the driving season to come in the spring. WTIC crude can easily drop another $15 bl. during
this layover. Moreover, it may be Jan. '15 at the earliest when the current rapid downtrend
line is tested. Since the oil price has a way of trending up or down for extended periods,
it does not pay to try to catch tops or bottoms but does pay to look for trend reversals instead.

WTIC Daily

SPX Daily -- The Thundering Herd

On Tues. 12/15 (scroll down), I mentioned the SPX had become oversold enough to attract
long side interest, and we sure got it. SPX Daily

The action since mid - Sep. largely features HERD behavior with rapid downs and ups. Nearly
mindless players appear to be driving the market in the short run. I can understand the increased
volatility up to a point. Folks know it is an expensive market with large downside if the
fundamentals go wrong. And, they know that moving heavily into cash which offers negative
real returns is not a place they want to be for long if the market starts up again. For many years
I would tell people that the stock market was a serious business but one not to be taken too
seriously. And now, as I glide toward life's Hawaii room, I am starting to look at the stock market
as not being a serious business but one that should be taken very seriously if you have money
invested. Let us hope this is the storm before the calm.

Monetary Policy

By post WW 2 standards, the Fed surely should have raised the FFR% today and abandoned
its ZIRP. By these standards, the Fed is now engaging in heavy handed interest rate suppression.
So, what gives? Interestingly, The Fed's data on production capacity growth shows that it is
on an accelerating path, reaching 3.1% yr/yr in Nov. That represents the strongest reading of
capacity expansion since 2001, and suggests to the FOMC that the economy can tolerate
continued moderate production growth without running a high risk of overheating. And, I
think They are figuring that by keeping the ZIRP in place, additional time can be bought to
allow more slack to be wrung out of the labor market so that there is eventually stronger
full - time employment and, perhaps, some upward pressure on wage rates.

Industrial output rose a strong 5.2% yr/yr through Nov. It may also be that the Fed suspects
that this pace of growth is unsustainable especially now that it has allowed the QE program
to expire. The Fed does not want to have to come back with another QE maneuver and by
allowing short rates to hover at the zero bound level for a longer period of time, it can buy
some more insurance to extend the economic expansion. We all need to keep in mind that
we live in a highly leveraged world, and with low inflation yet still decelerating, central
banks would like dearly to avoid having the deflation wolf come to the door.

Finally, the Fed may wish to tone down the rise in the value of the US $. If keeping the
ZIRP in place for awhile will help retard the dollar's progress, well that may be ok, too
as The Fed and the Treasury know full well that foreign issuance of US $ denominated debt
has proliferated in recent years.

SPX -- Daily

The fast correction in the SPX from Sep. into mid - Oct. ended with a spike bottom and a
quick, triumphant rally to new highs. The argument here has been that spike bottoms are
frequently tested and that the market has been overbought since mid - Nov. To compound it,
the insouciant "buy the dip" crowd tried hard for a few weeks to push the market higher even
though it was already in a significant overbought condition. The hope here was to cruise
through the ending days of 2014 on an upswing with a combo Santa Claus and Sugar Plum
Fairy rally and to leave whatever worries to be sorted out early next year.

However, it only took a very brief period without good positive momentum for another
pullback to develop and send the market into another sharp short term downtrend. The SPX
is now mildly oversold and should begin to attract long side interest soon. However, even
if the SPX were to begin rallying again here in the next few days, it would put the trend off the
spike Oct. low on a very high trajectory which would likely not sustain before the market
would face more remedial action. SPX Daily

Financial System Liquidity

Private sector liquidity growth has been averaging around 5.5% yr/yr recently. This growth has
been sufficient to fund the real economy, especially given the low rate of inflation. Total
sector liquidity growth to include the Fed's balance sheet was up 7.5% yr/yr through Nov.
Funding requirements for the stock and bond markets continue to be supported by the excess
liquidity provided by the Fed. But note that the Fed's balance sheet is no longer growing and that
total financial sector liquidity expansion measured yr/yr is falling steadily and appreciably. The
Fed is thus tightening monetary policy with the tapering and now expiration of QE 3.

Paced by 10 % growth of business loans, the banking system's total loan book continues to
expand. However, system liquidity remains strong as the banks have been able to grow the
loan book as well as add to short term Treasury positions. My short term credit / supply
pressure gauge is firming up in favor of demand. The gauge is a mild +5.0 but has increased
sharply since late 2013, a fact that will not be lost on the rate hawks at the Fed.

My markets cash reserve indicator has reversed course since mid - 2014 and is now rising.
The action is mild so far, but it signals a bit more portfolio manager caution on equities in
recent months.

Shanghai Quickie

When folks love the Shanghai composite, they really love it. The recent vertical move up is
right in there with the bubble inflation starting in late 2006 and the high speed run - up
starting in late 2009 when the big credit stimulus package was announced. Shanghai Daily

The RSI has topped 90 in the recent skyward move and that by the Shanghai's gaudy standards
is an overbought of consequence. Note as well that the index is now testing longer term price
resistance in the 3000 - 3200 range.

Stock Market -- Short term

Fundamentals
The SPX is up 12.3% for the year through Dec.5. Most US portfolios have underperformed this
benchmark by a significant margin. Charitably, the average portfolio is up about 3.5 - 4.0% for
the same period. The broad economy has been comparatively strong this year. Business pricing
power has not been strong, however, with sharp weakness evident for the oil patch and a range
of commodities producers. In addition, a stronger dollar may have attracted some offshore
money into the US, but it is penalizing the eps of a number of multinationals via translation
penalties, and it concerns some holders of small cap domestic shares who know that a stronger
dollar can attract foreign competition in previously more secure markets. Finally, the expiration
of QE 3 has led to a rotation in favor of large cap established companies and away from the
shares of smaller companies where volatility is higher.

It is also interesting to note that the SP 500 has been matched in performance this year by the
long Treasury bond. This reflects both risk aversion from the end of QE 3 as well as the
continuation of low inflation and short rates at the zero bound level.

Check out the relative performance of the SPX against The Russell 2000, the Value Line
1700+ issue equal weighted index and the Long Treas. SPX Weekly

Favorable monthly data for new orders, employment, auto sales etc. have helped the market
recover from the recent Oct. lows. Despite the sparkle of the monthly data, the weekly
forward looking indicators have been trending down since early Aug. and suggest that an
economic slowdown may not be far off.

Technical
As pointed out in a note on Nov. 13, the SPX is overbought. Since, it has soldiered on to hold
that overbought. SPX Daily  Players have been reluctant to leave the party for the big cap stocks
in hopes that they will be rewarded with a nice Santa rally as the year winds up.

Oil Price

Technical
WTI crude broke a nice five year uptrend featuring an $18 bl. price range in Jun. A fast and
deep downside breakaway has taken place since which knocked out supports at $80 and $70
and which currently leaves the market a little above long term support running back to 1999
and which now stands at $60 bl. The current speedy bear market is typical of a substantial
oil price decline and, in the modern era, such declines usually do not reverse quickly with
fast carry to new highs.

A break in long term support below $60 certainly cannot be discounted. If this occurs and
the market extends trading below the long term support line, it would raise the question of
whether there is a new ball game afoot for industry fortunes.

The market is deeply oversold. With WTI crude now trading at more than a 30% discount to
its 40 wk m/a, it will have the attention of short term traders looking for a positive bounce.
Note also the hefty oversolds now being registered by RSI and MACD. $WTIC Weekly

The oil price tends to trend strongly up or down. Thus, when a reversal of trend arrives,
trading it can be done with surprisingly little risk over the intermediate term. In short, it
is not worth the effort to try and catch tops or bottoms but is worth the effort to trade
when there is evidence of a trend reversal.

The oil price does tend to enjoy a seasonal bounce which begins in mid - Dec. and whch
runs into early Jan. Continuation of the current strong downtrend right through Dec. would
veer toward the ominous.

Wealth & Liquidity Transfer
Excess production is now a relatively modest 500K Bd. However, with fast rising US output
and modest demand growth, the oil gurus have the rate of excess global output rising to 1.5
million Bd. by year's end 2015. It is this longer range view of supply / demand that has the
market so worried. Should oversupply widen out as many now expect, there could well be
a huge wealth and liquidity transfer of up to 1.3 $trillion from net producers of oil to net
consumers over the next year. Such a grand transfer would lead to some major changes in
fortune for a range of countries on either side  of the production / consumption divide, and
might spur unrest and geopolitical bad behavior among countries least able to lose the petro -
dollars. As for oil companies, remember that the lever on the way up is the screw on the way
down.

Strategy
When you reach my age of 75, you will find you have to obtain a Papal Dispensation to short
markets. So, any interest I have in oil would be on the long side. On this issue, I plan to
see if still large oil futures positions by financial speculators need to be wrung out and to wait
for indications of a trend reversal.


  

SPX Monthly -- November, 2014

Fundamentals
Bull market in place since early 2009 remains in place. With the termination of QE, the easy
money portion of the bull is over. Profile is now moderate return for the assumption of much
higher risk. Liquidity cycle still strong at present, but progressive deceleration in growth of
liquidity measured yr/yr % suggests a moderation of business sales and profits growth in
2015 and early 2016. History makes clear that the cessation of large QE programs can work to
destabilize the economy unless consumer / business / banking confidence remain high and
private sector liquidity growth progresses at a moderate pace. Capital resources including
physical capacity, underutilized labor and banking system liquidity remain ample enough to
support moderate economic expansion through 2016. Inflation potential is modest so there
is no visible need for the Fed to raise short term rates enough to curb economic overheating.

Valuation
The market's p/e ratio stands at 17.5 x likely 2014 net per share. there has been a sharp
elevation in the p/e since 2011 reflecting a strong deceleration of inflation, the major QE
program and rising investor confidence in  the modest growth / low inflation story. Some
players remain convinced the Fed will re-institute some form of QE if the economy falters in
the months ahead.

I have the SPX  valued at a p/e of 17x based upon an assumed longer range earnings plowback
ratio of 60% (Currently, the breakdown is dividend payout 34%, plowback 66%).

Players must now pay a premium p/e on cyclically elevated earnings to be  long in the market.
The p/e on long term trend earnings of  $90 per SPX share is 23x. It is a very expensive
market on this basis.

Technical
The SPX is quite extended on the super long term channel as well as that of the current bull
market. Long term measures of RSI, MACD and price momentum are all at very elevated
levels. A substantial long term overbought happens to dovetail with a rich market on
fundamental grounds. SPX Monthly

Gold Price

Gold still has a chance to be an interesting long side trade, but some ground needs to be cleared
first.

Gold Bear Market
The deep but temporary break below $1200 support earlier this month re-affirmed the bear market
that has been in place since late 2011. It also showed an important break below the long term
uptrend line in place since the early part of 2001. The one bright spot on the gold chart is that
when gold broke the long term uptrend line at 1220 in Sep., there was indeed a breakaway down
move in price, but gold has since rallied up close to prior support at $1200. On the negative side,
there is the possibility that gold may now have the $1200 price as resistance. Weekly Gold

Poor Present Fundamentals
The gold price has been hurt by the deceleration of inflation underway since the autumn of
2011. More recently, weakness in the oil price and a strong US dollar have been negative factors.
Less well recognized is that a rising US stock market since the latter part of 2011 has drawn
risk capital away from the PM markets in a fairly steady fashion (See bottom panel of chart).
Gold had competed successfully with stocks over much of the 2001 - 2011 period and had
attracted the interest of many financial market players and not just the more traditional bugz.
This play has been walked back in earnest.

How Might The Environment For Gold Improve In The Year Ahead?
Quantitative easing has ended in the US. But, it has been accelerated in Japan, and China is
is moving toward more monetary ease. These moves could pressure more Asian economies
to follow suit. Moreover, even the ECB is slouching toward more monetary liquidity
expansion as the EU grapples with very slow growth and flirts with deflation. Thus, economic
growth offshore the US could firm up at some point next year. This might lead to stronger
demand for commodities in general and might reduce some of the excess supply in the oil
market. In turn, a better offshore economic environment might eventually lead to a reduction
in the "fear" trade which has recently favored the US dollar and brought it to an overbought
position. To conclude, there could be a sort of speculative three cushion billiard shot that
eventually benefits the gold market.

This sort of conjecture is not normally my cup of tea, but I am intrigued that the gold price
has been stubborn recently against a downside breakaway that seemed clearly in the cards.

China Eases Monetary Policy....

The PBOC cut benchmark short rates today and continued with targeted liquidity injections.
Following a nice increase earlier in the year China M-2 money growth has flattened out
despite liquidity injection measures in recent months. With real estate asset values in decline,
China's very large shadow banking system is likely experiencing cash flow difficulties and
rising debt liquidation. To counter shrinking sub-sector liquidity, the PBOC is likely  preparing
more aggressive liquidity support ahead.

the Shanghai was up 1.4% today and is closing in on 2500. With the Shanghai - Hong Kong
trading link in place and a turn to easier monetary policy, there may be further interest
in China stocks. Note though that IPO volume is scheduled to pick up sharply with dilutive
effect on the Shanghai. With a new year nearly upon us,  and The PBOC now interested in
goosing liquidity, I have raised my fully valued target to Shanghai 2575 for 2015. $SSEC

This past summer the long side trade was clean and easy. With an accomodative  PBOC, it
may continue so. However, I am far from sure we have seen the last of short term stop / go policy
and monetary experimentation. Since I am a world away from China, and have some other
trades in mind, I am likely to be more of an observer than a player for the forseeable future.
The idea here is not to bad mouth the market but to watch how the reforms program co -exists
with the obvious pressure to maintain 7% or better real growth. Mr. Xi is going to be "wing
walking" for a while.

Inflation Potential

Inflation pressure gauges I use are currently rather subdued. Put simply, the global economic
expansion underway has not cut far enough into excess capacity to sustain the normal cyclical
acceleration of inflation that comes with a recovery / growth period. Recent expansion of
global capacity has continued at a moderate pace and demand growth of 4% needed to reduce
excesses has not been sustained. In the US, for example, the economy has expanded for over
five years, but the operating rate is still below 80% as companies have been adding capacity
since late 2010, with the current yr/yr growth 2.1%.

I have a long term inflation model which compares money M2 growth against real economic
growth potential. This model is based on 10 year averages and currently pegs inflation potential
at 4% per annum. The US experienced peak cycle - to - date 12 month inflation of 4% for just
a brief period in 2011.

The strong cycle of monetary liquidity growth experienced over the past year should have
resulted in the beginnings of a cycle of accelerating inflation this year. One future gauge
of pricing pressure has been moving up in 2014, but the move has been exceedingly modest.
My primary inflation pressure gauge, which gives heavy weights to commodities prices
and factory operating rates, did pick up sharply this year, but has settled down in recent
months. $CRB Commodity Comp. Weekly

Note the top panel of the chart which shows yr/yr momentum of the CRB. When it rises to
10% or above and can sustain that level for a period of a few months, US CPI inflation
accelerates. As you can see yr/yr price action for the CRB  has spent a fair amount of time
in negative territory in recent years.

In the Nov. 10 post, I discussed why the economy has the available capital in terms of
resources to grow for several more years. History does strongly suggest there will be some
upside pressure on the inflation rate ahead unless capacity growth is fast enough relative
to output gains to keep operating rates from rising too sharply.

Over the very long run, US inflation has averaged around 3%. Conditions now do not
support a rise of inflation to the long term average.

Liquidity Cycle

Measured yr/yr, total US system liquidity growth (including the Fed's balance sheet) is in a
downtrend but remains a significantly positive 8% going into early Nov.. The stronger liquidity
growth since the latter part of 2013 has supported an acceleration in business activity with
US sales running about +6.5% yr/yr and SP 500 net per share rising more (Latest 12 mo. eps
is running about $115).

Hefty liquidity growth  normally underwrites an eventual cyclical acceleration of the inflation
rate, but that has yet to happen as slow global economic growth coupled with modest gains in
production capacity have kept pricing relatively stable at a nominal level.

Private sector liquidity growth has been averaging 5.8% on a yr/yr basis, and with no more QE,
total US system liquidity growth by late 2015 could be down to about 4 - 5%. This suggests
that looking out to mid - 2016, business sales and earnings growth could be very much more
moderate than today with business pricing power remaining muted.

Thus it is that at the G-20 summit this week in Brisbane, participants pledged to use fiscal
policy, trade deals and, probably, more monetary easing to produce an additional $2 trillion
in global GDP over the next couple of years. We certainly do not know whether they will
be successful, but we do know they fear the return of the deflation wolf to the door.

From this point on, I regard the base economic case for the US to be veering toward the grim
side eventually and I would be delighted to be too conservative and to be wrong. For now, the
US should find the sailing relatively smooth as the liquidity tailwind is still fairly strong and
is moderating at a measured pace. But this will change as time wears on.

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US Dollar -- Should Be Slow, Grinding Bull

It has been my view for the the past ten years that changing US demographics, recovering
energy output and increased demand for a range of domestic specialty manufacture and
technology would lead to a gradual elimination of the the trade deficit and the elimination
of a net outflow of dollars through the trade window. The US trade deficit has been cut nearly
in half from peak levels seen a half dozen years ago and may zero out by 2020. So, back at
points in 2009 and 2010 when the USD was at 75, I began figuring it could add 2 - 3 points a
year in value and may be close out 2020 with the popular $USD index at 100.

The sharp rally in the dollar this year has been the talk of the town, and it is likely well
overbought currently. $USD However, the economics to me suggest that the dollar should
continue to work slowly higher over the next five years, and could strengthen even more rapidly
if US hydrocarbon export restrictions are lifted.

SPX -- Short Term Overbought

This new upleg in the market which began in mid - Oct. has so far beaten the long term odds
against holding a spike bottom without a retest and has traveled up to new high ground. The
rally has started to lose some momentum but is still on an unsustainable trajectory. It is also pretty
strongly overbought on a short term basis. Despite the roll over in short term price momentum,
trader profit taking has obviously remained in abeyance and reflects the high expectations players
have that the year will finish strongly. SPX Daily

Most fund managers have underperformed the broad market this year and this sharp rally has
prompted stragglers to extend long lest they fall further behind in the relative performance derby.

US Stock Market In A New Period

Overview
The cyclical bull remains intact. However, with QE having ended, the Fed no longer has your
back. That spells higher risk, and it means you should now weigh a broader list of fundamentals
more heavily. True cyclical bear markets are preceded by rising short term interest rates and a credit
crunch that induces recession or worse. I will not get a sell signal on my cyclical model until short
rates start rising along with bond yields. Private sector credit creation is normally critical in
underwriting continued economic expansion and an extension of a bull market. Unfortunately,
credit demand is not normally a useful indicator for market timing as the private sector's loan
book can continue rising even after a downturn has begun. So, that is why you have to watch
a variety of factors.

Capital Slack
I use a compilation of indicators to monitor slack in the system to include idle production
capacity and labor as well as the trend of short rates and measures of bank balance sheet liquidity.
When slack has evaporated, the economy is in overheat mode with accelerating inflation. That
is usually when the Fed begins to crunch the economy. When my index reaches a range of 180 -
185, the economy is overheating and it along with the stock market are vulnerable. The index
is now lingering in the low 170s and banking sector liquidity is ample. In this broad framework,
economic expansion and the bull market can wear on for a couple of more years.

Business  Sales & Profits Growth Momentum
With QE having ended, the stock market can be expected to become more sensitive to the
momentum of business sales and profits. I use a variety of measures here, and they point to
an acceleration of business sales and profits growth starting from mid - 2013 and continuing
on currently. My Weekly Cyclical Fundamental Indicator is a forward looking measure and
that has weakened noticeably since early Aug. reflecting a pronounced downturn in
sensitive materials prices. I think stock market players have waved such price weakness off
on the premise that it reflects slower global economic growth and is not seen as a short
term concern. But it should not be sloughed off because slower global growth affects the
large US export sector, business pricing power, and can lead to negative translation penalties
which can accrue to profits should the dollar remain strong.

Often, S&P 500 net per share gets strong enough that it becomes very extended relative to
its long term trend. As fate would have it, this development occurs around market tops
because the Fed is usually in crunch mode. We are not there yet, but earnings could become
just so extended  in late 2015 or early 2016. It will be interesting to see where the Fed is
by then with policy.

Oil Price

Recent strong price weakness reflects two factors. First, growth of crude supply has exceeded
expectations of early this year as US crude output has surged to formidable levels. Second,
growth of global industrial output measured yr/yr has slowed from 4% earlier in 2014 down to
about 3% recently reflecting disappointing results in the EU, Japan and China. Small increments
in spare capacity at the wellhead can lead to substantial price adjustments when they first appear.
Hence, WTI crude has fallen from $107.50 bl this Jun. down to around the $78 area.

To counter the US crude production surge, the Saudi's are offering discounts on crude shipped to
the US. We can assume the Saudi's have been estimating break evens on new crude and we'll
see how that works. Since the US is the major arms supplier to Saudi Arabia, we are not without
a degree of counter leverage if we want to use it.

The US and China are now limiting liquidity support to the world economy. Japan is stepping up
with additional QE to ramp its exports. The EU is in turmoil about monetary stimulus and we
can only wait to see whether they will muster a truly substantive program of monetary easing
to counter a continuing sluggish and now deflation prone economy.

The crude price is in a steep downtrend and a deep oversold has developed. Chart indicators
show this point along with another technical item worthy of note: Crude is closing in on a
20% discount to its 200 day m/a, a discount that will attract trader attention. WTIC Daily

With the peak driving season well past, crude is in a seaonally weak period that can not only
last through mid-Dec. but resume again in Jan., and run through to the normal seasonal low in
Feb. Thus on a seasonal basis, the rewards to buying an oversold market may be more limited
than normal. As well, as the chart on the crude future shows in the bottom panel below, there
has been very large speculative interest on the long side from financial players who have only
recently begun to unwind their big positions. There are over 200K contracts out now and as
the chart shows those positions can zero out if players become sour enough. Crude fut. + COT

I like to trade crude, but I'll bide my time for now and watch for indications of a positive
reversal.