For Monday, Oct 3, 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 S&P 500 plunged 2.5% on Friday. Volume was lower than Thursday and lower than the 30-day moving average volume. The large drop caused our forecast to switch from growth to uncertain based on the stop-loss algorithm. The S&P 500 would have to increase about 16 points (1.4%) on Monday to switch our forecast back to growth.

Subjective Comment:

Friday’s US market decline on lower volume followed Thursday’s market increase on higher volume. Bullish market action is precisely this pattern; up days on higher volume and down days on lower volume. The magnitude of Friday’s drop, 2.5%, is NOT typical. We are not yet seeing clear evidence the US markets are decoupling from Europe. In fact, European markets were also down sharply on Friday. It appears quite evident that the dominate force in the US market is what is happening as the Eurozone continues to struggle with massive debt, insolvent banks and a tight monetary policy. There also appears to be a popular belief among the US media that the US economy is heading to a double-dip recession, if indeed the recession that began in late 2008 ever ended. This popular belief combined with real European weakness appears to be dominating US markets. One very interesting rumor from Europe is the possibility Germany might leave the Euro. It’s not clear if this is a rumor, perhaps the German government is preparing in case they choose to leave the Euro, or if the decision has been made and preparations are under way. Bloomberg published a brief report that there will be talks in Berlin on October 6th to discuss “currencies”. The use of the plural form of currency is interesting given that all the attendees would normally be talking only about Euros. Reintroduction of the Deutschmark would be very bad for the Euro, but we don’t know how or if this would impact US markets.

While the Eurozone continues to be a drag on US markets, the rapidly expanding US money supply continues to cause inflationary price pressure. This will eventually drive serious price inflation along with an increase in US equities. It will also cause multiple economic indicators to show strength, including GDP. This will appear to be an economic recovery when in reality it is the beginning of yet another bubble boom phase of the business cycle. Given the very high levels of debt in the US, it is not at all clear if another multiyear bubble can be created by the Federal Reserve’s insanely loose monetary policy. (Our post for Sep 30 has the most current money supply growth rate figures.) The apparent improvement in the economy will be accompanied by serious price inflation. Manufactures have been reducing the size of packaged goods to disguise price increases, and the Consumer Price Index is highly manipulated to under-report actual inflation. Shadowstats.com shows CPI the way it was calculated in the early 1980’s and late 1970’s, and under that methodology the annual price inflation rate is over 12% and climbing. Shadowstats.com also publishes unemployment per the pre-1994 methodology, and it shows unemployment near 23% and growing. The bubble boom that is coming will surprise mainstream economists who do not understand the Austrian Business Cycle Theory. Since most media pundits and television investing personalities listen to Keynesian and Monetary Economists, they will also be surprised by the coming bubble boom. Knowing it is coming will give you an advantage because you’ll be able to invest early once the up-trend becomes apparent.

We will continue to publish our automated forecast along with our observations to help you decide when is the best time to resume investing in US equities. Even though Austrian Business Cycle Theory clearly explains what is happening in Europe and the US (and China too), it remains difficult to predict when the effects of monetary policy will begin to dominate the economy and equity markets. The opposing forces, downward from Europe and upward from the US, also make it very difficult to figure out when the turning point will occur. These opposing forces explain the high levels of volatility present for the past month. High volatility will persist. When the US and Europe decouple and a clear up-trend develops in the US, be prepared to invest quickly.

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