For Monday, Aug 8, the market forecast is uncertain

We recommend selling your equity positions.  Avoid money market funds as a cash alternative due to exposure to European sovereign default risk.

Technical Comment:
Friday’s large market decline, rise, drop and then close just barely below Thursday’s close was on higher volume. The lower close on higher volume further developed a pattern typically seen prior to further downward action. The pattern is more developed, but not fully formed. Had the market closed a little above Thursday’s close, the pattern development would have been very different. Our forecast for the market direction remains uncertain.

Subjective Comment:
We have commented on the dual formation of growth and decline patterns at market turning points. Friday’s large swings back and forth show this phenomena in dramatic fashion. For every seller, there is a buyer, and both sides of the trade think they are making the right decision. As prices drop, many sellers see losses and wish to avoid further declines. Buyers see bargain opportunities. The increasing US money supply clearly has found its way to the pockets of buyers who are betting the market will turn upward. Additional up and down motion is likely for the next week or so. A new trend will eventually develop, and we think it will be upward. Our reasoning remains the same; the accelerating growth in the US money supply will drive price inflation and US equity markets higher in the near future.

Standard and Poor’s downgraded US debt Friday afternoon after the market closed. This will probably have an impact on markets on Monday. Some speculate the downgrade is already priced into the market. Others think money will flow out of bonds and have to go somewhere, perhaps driving equities up. Large pension funds that have rules about investing only in AAA rated debt will either have to change their rules or dump Treasury holdings. This will be happening as the US Treasury attempts to sell $650 Billion of gross debt during August. This will be the beginning of increasing interest rates. It will probably be a generation before these historic low interest rates are seen again.

Europe continues to experience sovereign problems with Italy taking center stage and Spain not far behind. The insolvency of these countries combined with a slowing in the growth of Euros will continue to crash European markets. This can have a panic impact on some US investors. Chinese inflation continues to be a major problem. Like Europe, China’s tightening of its money supply will crash its market. In the US, not only is the Dollar money supply growth accelerating, but the market drop and volatility is causing many to speculate the Federal Reserve will announce QE3 or some other form of monetary accommodation after their FOMC meeting on Tuesday, August 9th. With the Bank of Japan, the Swiss National Bank and other central banks announcing their intention to devalue their currencies, there is mounting pressure on the Fed to do the same with the Dollar. We strongly oppose money printing and think it is always foolish to do so, but we acknowledge this is what central banks do. Keep watching our forecast for the opportunity to get back into the market. Our opinion is the market will eventually grow and our forecast will identify when to take advantage of the coming up-trend.

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