For Tuesday, Oct 4, 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 again on Monday, this time 2.9%. Unlike Friday when the S&P dropped 2.5% on lower volume, Monday’s market drop was on volume higher than Friday’s and higher than the 30-day moving average volume. The stop-loss algorithm of our forecasting process is tracking the decline in the market. Consequently, an increase of about 16 points (1.4%) on the S&P 500 on Tuesday would likely switch our forecast back to growth.

Subjective Comment:
Monday’s sharp decline was again influenced by weakness from Europe. The situation in Europe remains unchanged and will continue to decline because of the tight money supply policy of the European Central Bank (ECB). Headlines continue to drive European markets, which in turn drive US markets. The news from the Greek government is they have failed to meet their deficit reduction targets. Regardless of the news the fact remains it is the tight monetary policy imposed after a period of money supply expansion that is the root cause of Europe’s problems. ECB President Jean-Claude Trichet will be succeeded on October 31st by Mario Draghi. There has been speculation the ECB could resume Euro printing when Mr. Draghi takes over next month. Unless and until that happens, we expect the Eurozone economies to contract and European markets to decline. Currently this continues to dominate US market action, although it is not clear if this trend will continue.

Popular opinion in the US is mostly negative on the outlook of the economy and US stock markets. The recent weakness combined with lagging economic indicators has most Keynesian economists and commentators predicting further declines in the US, and some are calling for more fiscal and monetary stimulus. The US money supply is rapidly expanding at near historic growth rates. The growth is not from money printing at the Federal Reserve, but from the money multiplier caused by fractional reserve lending. US banks are lending again as demonstrated by the growth in required reserves. As this continues, the use economy will enter a bubble-boom with rising consumer prices and rising stock prices. We have not reached the point where the expanding Dollar supply will force US markets higher as the headwinds from Europe remain stronger. It is possible the Fed could resume Quantitative Easing to print more money. Dallas Fed President Fisher on CNBC today said he thinks CPI measured inflation, currently at 3.8%, will fall back to 2%. This could be propaganda to quell fears of price inflation, or it could be indicative of ignorance regarding the monetary forces in play. If this is what the Fed actually thinks, then they could be open to the idea of resuming money printing. (Their current Operation Twist involves purchasing of US Treasury bonds, but it is not digital creation of new money since they are funding it by selling equal amounts of bonds. This is called sanitizing the purchases.) We have no idea what the Fed might do. We fully expect the coming bubble-boom to cause US markets to increase in the near future. Additional Fed money printing would probably cause the US markets to decouple from Europe that much faster.