About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, June 23, 2017

SPX -- Weekly

The SPX is still running OK positive, but the broader market, featuring breadth and unweighted
price indices like the Value Line Arithmetric ($VLE), are lagging and falling behind on trend
momentum. At this stage, there is a growing preference for the larger cap. more liquid names.
My weekly cyclical fundamental economic indicators have been on the flat side since late Jan.
and suggest a loss of positive economic momentum out ahead. Unweighted market measures are
performing more in line with the economic data weeklies as the SPX rolls on. I have argued in
recent weeks that the SPX had a reasonable shot at rising above 2400, but I have run out of short
run insights to support a continued advance and see no compelling reason for the SPX to move
above the recent high of 2450. Weekly SPX

The bottom panel of the chart shows the relative strength of the Value Line to the SPX. As can be
seen, the SPX can easily outpace the VLE for the intermediate term, but a market led by a broad
array of mid - cap. and smaller cap. favorites is healthier and more sustainable.

Of note here is that the Senate is set to take up the nasty health care bill this week. If the Senate
leadership can horse trade its way to passage of the bill, it might boost the spirits of investors
who are still considering the large tax cuts for the wealthy in the bill as a set-up and lead-in
to the tax reform proposal.

Wednesday, June 21, 2017

Oil Price

Back on 2/5/17, I posted that the oil price was quite vulnerable to a price correction given the
record level of speculative interest in the futures market and the parabolic recovery in the price
since early 2016, when WTIC crude made a multi year low of about $26 bbl. Since the 2/5 post,
the oil price has retreated by nearly 23% and the trend has turned bearish.  $WTIC


There has been a strong market observer consensus for some time that oil would trade through
2017 in a range of $40 - 60. The sky high speculative long side interest has been sorely dis-
appointed, and now crude is edging toward the bottom of the consensus range. Even though
speculative interest in going long crude is now far from the peak, it remains sizable. But, the
price is now approaching an oversold condition on RSI, its first since early 2016. The price
trend shown on the attached chart suggests a test of the $40 mark out ahead and if it does not
dive sharply below that level, oil could be interesting as a long.

Monday, June 12, 2017

SPX -- Daily

The SPX continues in a well pronounced uptrend since 2/16, one that includes a clear breakout to
record highs in the wake of the Trump election victory. The enthusiasm generated by the Trump
victory reflected a fast building of consensus that US business was on the verge of a new bright
era of faster growth. May be that there would be an acceleration of top line real growth, but the
real kicker here was  the outlines of tax reform and dollar repatriation programs that alone could
boost SPX net per share by 25% over the years immediately ahead in concert with a new health
care program that would significantly line the pockets of the wealthy at the expense of most others.

The market has continued to rally this year even though the Trump agenda cloud cover reflects his own doing. Without the Trump stimulus measures, profits  are not likely grow more than 4% a year going forward after this year's recovery. There are other market players who may be content without the Trump stimulus play provided there is no significant acceleration of inflation and assuming the Fed will continue to move very slowly on its plan to raise short rates. This latter view is reflected in the narrowing of the long Treas. yield curve this year by about 50 basis points.

The market has run well out ahead of the Trump stimulus outlines since the faster rate of inflation
that would accompany stimulus laid over an economy that is already well along in its expansion
phase would force the Fed's hand on rates and probably force down the market p/e ratio. In turn,
if the Trump plans die in Congress, and we have to trundle along with low earnings growth, why
chase the current trajectory of the market?  SPX Daily


Sunday, June 04, 2017

Broader Stock Market

In the post last week, (scroll down) I included the monthly SPX chart but focused on how the Big
Money has viewed valuation in the market via The Rule of 20. From a comparative perspective, this
is a rather liberal way to value the market, but it helps explain whose been in charge. The monthly,
weekly, and daily SPX charts are all trend positive but are also overbought. This post takes a
broader perspective and not one that is capitalization weighted.

First, I show the equal market weighted Value Line Arithmetic index of 1700 + stocks (almost
half of all publicly trade individual equities).  $VLE Weekly The index made a new closing record
high this week, and remains on trend form the Feb. '16 low. It is not nearly as overbought as the
comparable SPX. I am happiest when the VLE is outperforming the SPX. Such has not been the
case since 12/16, and signals moderately weakening confidence in the broader economic picture
Performance of the VLE is much more in line with my weekly cyclical fundamental indicator
which been flat since around year end 2016.

Next, I have attached the cumulative NYSE advance / decline line. It too is on trend and at new
record highs. The A / D line is getting heavily overbought for the intermediate term, but note
that with breadth in an advancing market, overbought conditions can hang around for weeks
before there is a break.  $NYAD Weekly

Wednesday, May 31, 2017

SPX Monthly And The Rule Of 20

Starting in the 1960s, capital asset pricing began to shift focus, tying prospective asset returns to
the levels of the risk free rate (91 day T-Bill yield) and the rate of inflation. In broad terms,
equity strategists started tying the rate of earnings capitalization (the market p/e ratio) to the Bill
yield and inflation, with the market p/e ratio set to vary inversely with the levels of short term
interest rates and of inflation. With some empirical foundation, strategists came up with the 'the
rule of 20' which lays out that the market p/e ratio = 20 - the inflation rate. Thus if underlying
inflation is 2%, the SPX should trade for around 18x net per share. There are different sorts of
issues and problems with the formulation, but it has retained significant popularity.

Using a long term trend line, SPX net should be around $135. out through mid - 2018 and the
market should trade around 2430 (18 x $135.). Under this method, the SPX is reasonable or
fairly valued. There is an issue that investors have not fully broached yet. How reasonable is it
to assume that SPX net per share will grow at 6.5% in the years ahead when the top line or sales
growth may struggle to reach 5% and companies have been squeezing cost structures for years
to boost profit margins? This is why a number of well seasoned  strategists are warning that in an
era of real growth below the long term average, investors must brace for lower returns.

For a good while this year, investors were not troubled because they saw the Trump / GOP nexus
pushing stimulus plans that would boost top line growth somewhat and lower the corporate
income tax. But Trump's troubles and a GOP that lacks the unity to push stimulus programs
through raises questions about whether SPX earning power will be strong enough to sustain
the 6.5% growth trend for the next several years.

Whatever your strategic approach to the market may be, the preceding three paragraphs offers
good insight into how the Big Money plays the game most of the time.

Attached is the SPX Monthly Chart. Pay careful attention to the continuing positive reading
of the monthly MACD indicator -- It does not whipsaw often.

Saturday, May 27, 2017

Stock Market

The week before last, the boyz were hollering for a break above SPX 2400 as they feared having
to deal with a double top. And they got one! The market loves to punish the vocally demanding,
but not this time. Last week's advance keeps the post election rally alive, at least for the large cap
sector of the market. The trend up from the Nov. low remains sharp, but there remains little room
to avoid a break in the weeks ahead. The SPX remains moderately overbought on a momentum
basis. It was allowed last week that it could break above 2400 in the short term and there is still
a little bit of room to push it higher. However, the SPX remains heavily overbought looking out
3 - 6 months. SPX Weekly

The weekly cyclical fundamental directional indicator has been flat since the end of Jan. this year,
but it has improved nicely over the past couple weeks reflecting the remarkable performance of
the new jobless claims indicator which has dropped sharply to a 44 year low. Total civilian
employment is up only 1.0% y/y, but it is the jobless claims data that wags the dog here. I would
like to see more positive breadth among the weekly data, but initial claims has been a trader
favorite for years. Among the indicators, sensitive materials prices have turned weak since early
in the year. This development has been a nice positive for the bond market and it may also account
partly for investor preference for large cap stocks.

From a fundamental indicator perspective, the cyclical case was very strong for equities for most
of 2016, but has weakened appreciably since earlier in this year. the SPX is holding its uptrend
nicely in 2017, but without strong and comforting cyclical support.

Sunday, May 21, 2017

SPX -- Weekly

My e-inbox is stuffed this week with indications of growing pundit / strategist impatience. This
is the first such suggestion in 2017, although it should not be a surprise given the continuing
flat market and a volatile week. I am not receiving  much bearish commentary, but rather
intimations that its high time for more upside or, maybe it will be wise to think about reducing
exposure.

My forward looking cyclical economic indicators have continued on the flat side since the end
of January, and, like the market, have not evidenced much in the way of volatility. The Congress
has taken up tax reform with emphasis on revenue take neutrality, and it is possible traders are
starting to miss Trump team leadership on a more stimulative set of guidelines with a clear focus
on significant deficit financing.

The weekly SPX chart shows the market is still working off a serious intermediate term over-
bought situation including now double top resistance at 2400. The market's range over the past
few months has been tight and there has not been the sort of sustained corrective action to
provoke thinking that a fresh buying opportunity might be at hand.  Similarly, there has not been
a test of the 40 wk. m/a since last autumn. I do not have a strong view on market direction near
term, but my discipline says not to trade extended overbought situations on the long side. The
chart does suggest there is upside through 2400 but maybe not very much.  SPX Weekly