[the following is a copy of our letter to clients last night (Sunday Sept 27)]

The stock market does stink right now.

How do I know? Well, stocks are in a Correction and gyrating up and down by large percentages, with a massive trading and investment press opinion tug of war on whether we are OK to return to S&P 500 price growth, or heading for a significant Bear market.

I also know because last Friday, Jim Cramer said, “This market stinks!” So there it is.

But let's look at some data instead of headlines and 30 second interviews. The evidence is split, but mounting on the side of more pain to come.

First, here is our table of market indicators that we have been updating for you over the last several weeks. It has some positive items, but a lot more negative items, and the negatives are a bit more negative than before, while the positives are about the same magnitude.

THE POSITIVE DATA:

The yield curve is still steep, more specifically the 10-year Treasury rate minus various shorter-term Treasury rates is still positive. In prior letter to you, we have shown that virtually all recessions are preceded by the yield going flat and then inverting (the spread between the longer and shorter rates going to zero, and then the shorter rates rising above the longer rates) – the New York federal reserve confirms that with their research.

Stock markets tend to go into Bears before recessions (and after, or coincidentally with, the yield curve going flat or inverted). The yield curve is still steep, and that is Bullish.

An argument could be made that in this artificially controlled interest rate market the yield spread is of little predictive value. Recognizing that, we are prepared to say the 3-mo/10-year spread may have no current meaning. However, the 2-year/10-year and the 5-yr/10-year is not Fed controlled (Fed influenced YES, but still in the domain of market forces, not just Fed decisions), so we think they have some predictive value.

The 2016 consensus earnings growth analyst forecast is nearly 10% higher than estimated 2015 operating earnings. That is good, but analysts tend to modify their estimate regularly and it's hard to know what they will think 3 months from now, or how energy earnings as a major wild card will change their estimates.

The Saint Louis Fed Financial Stress Index is on the low side of a +/- 1 standard deviation (“normal”) level. That is positive, but the different parameters measured by the Cleveland Fed for their stress index are at the high side of normal.