For Thursday, Aug 11, 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:
The very large swings in the S&P 500 and other US markets continued on Wednesday. The 4.4% drop (51 points) caused our stop-loss algorithm to change the forecast back to uncertain. Decline patterns continue to develop but have not fully formed. The downward motion on Wednesday was on the highest volume of the week. An increase of 19 points in the S&P 500 closing value on Thursday would likely be enough to change our forecast back to growth. Our model tends to swing back and forth when there are such large swings in the market. Our official forecast is now uncertain.

Subjective Comment:
Most experts are admitting they do not know what the market will do tomorrow, and that’s the most honest thing anyone can say. Subjective predictions, including our own stance that an up-trend is coming, are best considered as applicable after the near term volatility subsides. We will continue to disclose details of our forecasting algorithm to help you decide if you want to take action on our forecast or perhaps wait until a clear trend develops. (Our past performance estimates are always calculated from our forecast regardless of any subjective considerations.)

It is our continuing opinion that the problems of price inflation in China and European sovereign debt continue to be the driving forces in international markets, and the uncertainty is spilling over into social unrest and into US markets. The really big problem in Europe is the banking sector. While each country has its unique debt problems, all of the European banks have exposure to all the sovereign debt issues. Rumors Wednesday were that France’s credit rating was about to be downgraded. Greece has banned short selling for the next two months, but this will not help with their stock market. The Italian stock market continues to decline. Depositors have been withdrawing their funds from European banks in a slow-motion bank run that could accelerate at any moment. In the US, the Bank of America is thought to need cash desperately to avoid a collapse. These realities combined with large scale social unrest and rioting will dominate headlines, causing additional fear in US markets.

Wednesday’s price decline in the market was on higher volume, and this is typical of down-trends. We suspect day-to-day volatility to continue with more downward motion in reaction to headlines. This will eventually subside, at which point we thing the increasing US money supply will cause serious price inflation and a new up-trend in US markets. Our automated algorithms will continue to compare market data against historic patterns. That objective analysis will always be the source of our official forecast.

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