We do not intend to chase the S&P 500 breakout. As we wrote last week, "Over the next six months, our expected range for the S&P 500 is about 100 points above and below its current level - between 1230 and 1430." So far this year, we have made some gains versus our benchmarks by being overweight risk assets. Thus, we are preparing to become more neutrally positioned when we think stocks have reached a multi-month peak.

Economy moving to slower pace of expansion

Real GDP decelerated to a 1.8% annual growth rate in the first quarter, from 3.1% in the fourth quarter of last year. We view this as evidence that higher energy prices are beginning to sap personal consumption expenditures and worsen the trade deficit, while government cutbacks have begun to subtract from GDP (see Weekly Chart). Another concern we have is that initial jobless claims, which have a good correlation with economic growth, have moved back above 400,000 a wee, a level that we think indicates a downshift in growth. First quarter nominal GDP growth was 3.7% annualized; in other words, the impact of prices added 1.9 percentage points over real GDP, which hints at 'stagflation' although still nowhere near that which occurred in the late 1970s. As we have written previously, we believe nominal GDP growth around 6% is necessary to reduce the US' debt load (without default) over the long run.

David Fuller's view That last sentence above is sobering. Few of us would see any chance of US GDP growth experiencing a lengthy run of 6%, at least not until the US does eventually achieve the holy grail of energy independence, thanks to its vast reserves of shale gas and shale oil, in addition to nuclear power and renewable contributions. That is just possible, but probably not for 12 to 15 years. Currently, the US' debt load is still increasing.

Meanwhile, can the S&P 500 Index (weekly & daily) sustain its recent upside breakout?

I have my doubts, although I normally give breakouts the benefit of the doubt. Yes the US stock market has benefited from the cyclical bull trend, recent momentum, QE2, the soft USD and good Q1 earnings. However, the investor's heaven of accommodative monetary policy is likely to be cancelled out by the hell of commodity price inflation, in my view.

Even though the Continuous Commodity Index (weekly & daily) is overextended and now showing signs of falling back, what I have frequently described as the moderate spike in crude oil has already done some damage to future growth and earnings prospects.

The S&P 500 Index, shown above, has been impressive but remains susceptible to some additional mean reversion towards its rising 200-day moving average.

I am also concerned about the recent weakness of larger Asian Markets such as China's Shanghai A-Shares (weekly & daily) and India's Nifty (weekly & daily), not to mention Brazil's IBOV (weekly & daily).

These markets suggest that we will remain in a ranging corrective phase, at best. Additionally, breaks in the progressions of lower rally highs, where these downtrends are now evident, will be required to indicate that demand is regaining the upper hand.