For Friday, Aug 19, 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:
Thursday saw a resumption of the extreme volatility in US markets with the S&P 500 down almost 4.5%.  Volume was lower versus Wednesday and lower than the 30-day moving average.  The drop was sufficient to trigger the stop-loss algorithm, hence the shift to an uncertain forecast from our automated process.  The S&P would need to increase about 26 points (2.3%) on Friday to return our forecast to growth.

Subjective Comment:
Mainstream news coverage is beginning to note European sovereign debt and European Banking exposure to that debt as the cause for market turmoil in the Eurozone. Contagion fears to the US Banking sector is founded and caused the drop in US markets. The tightening of Euro money supply is having the predictable downward effect on their economies and stock markets, and the banks are facing a solvency crisis. Two days ago, a European bank borrowed $500 million from the European Central Bank (ECB) from a credit facility not used since March. No one knows what bank it was, but this seems to have triggered the market decline. After the market closed on Thursday, the Federal Reserve Bank of New York announced it lent $200 million to the Swiss National Bank (SNB). The SNB is the central bank of Switzerland. This information will probably further frighten market participants. Last week the large market swings in the US were up days and down days. It’s difficult to guess what tomorrow will do, but if the drop Thursday was banking concern driven, another drop Friday is very likely.

We continue to expect the expanding US money supply to drive up price inflation and stock prices, but it is clear the problems in Europe are overpowering right now. We will continue to publish our automated forecast, and it’s likely our forecast will swing back and forth between growth and uncertain if the market continues these large up-and-down swings. Should our forecast return to growth, you might consider waiting to see it remain on growth for two days before getting back into the market. Our system’s stop-loss algorithm is not well suited for these dramatic ups and downs.

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