For Wednesday, Aug 3, the market forecast is uncertain

We recommend selling your equity positions.  Avoid investing in money market funds due to their exposure to European bank holdings tied to European markets and sovereign debt.

Technical Comment:

The large drop in the S&P 500 index was unusual in both the index value magnitude, and for the remarkably light volume.  Volume was only 41% of the 30-day moving average volume.  Further downward action tomorrow on higher volume could complete a pattern that typically precedes further declines in the market.

Subjective Comment:

The technical details of today’s decline raise questions.  Why was volume so very light?  The political uncertainty of the debt ceiling resolved itself as expected.  Unfavorable economic data about recent past performance was published, possibly influencing  the market.  Still, if that was the case, why was there such a small volume?  Large movements in the index price can occur on light volume days like today,  so figuring out the reason for the light volume is probably key to guessing the near term action of the market.  We’re still expecting an up-turn in the US Market, but it is probably prudent to protect against additional downward movement until the turning point arrives.  The developing pattern discussed in the technical comment also motivates us to suggest holding cash instead of equities right now.

Here is our best guess of what is going on:  With the debt ceiling lifted, the US Treasury needs to raise $600 Billion (gross) this month.  Keep in mind $600 Billion is the size of QE2 conducted from last November through June.  The net debt the Treasury expects to borrow this quarter is $190 Billion, and $285 Billion next quarter.  The Fed may or may not announce a formal “QE3” program, but they will probably monetize some to most of the funding needs for the next several months.  Institutional money probably is avoiding equities and evaluating bond opportunities now that the ceiling has been raised.  The Fed’s next FOMC meeting is August 9th.  Stock Market action will probably be erratic on lighter volume until news from the FOMC meeting is published and the institutional investors develop their strategies.  While the economic data for the recent past appears bad, the money supply growth in the US continues to suggest a boom is coming.  This will seem counter intuitive based on recent poor performance and continuing bad news coming from the economies of the Euro-Zone and China.  Remember, the Euro and Chinese money supplies are tightening.  This will drive bad news from those economies.  News will be bad for a while before the US boom becomes obvious.  How long the boom will last is unknown.  The growth rates of the US money supply is the best indicator of how long it will last.  If the Fed begins printing money again, the boom could go into next year.  The boom will come with high price inflation.  Keep watching our forecast for when to invest.  Investing is risky, but unfortunately it is necessary to invest (with leverage) to get ahead of the coming price inflation.  Alternative investment suggestions outside of US Equity markets to consider include shorting the Chinese market, and going long with physical gold and silver.  Do your research if you want to consider these alternatives.

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