For Wednesday, Nov 02, the market forecast is uncertain

Market Forecast has changed to UNCERTIAN.

Technical Comment:

Tuesday was a second day of steep decline for US markets with the S&P 500 dropping 2.8% on volume higher than Monday but below the 30-day moving average volume.  The drop was large enough to trigger the stop-loss algorithm of our forecasting system.  If the S&P 500 had closed just 1 point higher (0.07% higher), the stop-loss would not have been tripped and our forecast would still be for “growth”.  If the S&P 500 closes higher on Wednesday, our forecast will return to “growth”.

Subjective Comment:

We noted the S&P 500 breakout above the 1216 – 1226 resistance back on October 21st.  Tuesday the S&P 500 closed at 1218 and had a low of 1215.  The 1216 – 1226 range remains a level of support as the two-day drop has not yet closed below this level.  Volume increased from Monday but remains below the 30-day average.  The light volume of the drop these past two days mitigates the significance regarding the overall upward trend.

The Eurozone weakness was again a drag on US markets.  Today’s high drama was initiated by Greek Prime Minister George Papandreou.  Instead of accepting the bailout that included a 50% reduction in Greek debt, PM Papandreou announced a national referendum (vote) on the question of accepting the deal.  This would take months to orchestrate.  He attended the summit meeting last week from where the bailout was announced, so he must have left the other leaders with the impression he would accept it.  By calling for a referendum he surprised all the other European politicians, including Greek politicians of his own party and in his cabinet!  He will meet with French President Sarkozy, German Chancellor Merkel and the new European Central Bank president Mario Draghi Wednesday evening (afternoon in the US).  There will be pressure on Greece to accept the bailout without the vote.  There has been one political resignation in the Greek parliament from Papandreou’s party, leaving them with a one-vote majority.  The top military leaders of Greece have been replaced.  Things are moving very fast.  News from the Eurozone will continue to dominate the direction of the market until there is some clarity provided.  For example, should ECB President Draghi announce monetization of debt (money printing) to buy bonds from Greece and other European nations in serious debt (Italy, Spain, etc.), this would calm things down.  In the long run printing Euros will only make matters worse for Europe, but it is a guessing game what happens next.

In the medium to longer term, the expanding money supply in the US will overpower the downward pressure from Europe.  The US economy is entering another bubble-boom thanks to the rapid bank lending.  More evidence of this was reported in the Wall Street Journal today.  US auto sales jumped 7.5% in October.  We’ve been writing for weeks about the rapid expansion of bank loans, and this obviously included car loans now that auto sales data is available.  The downward pressure from Europe exists because the ECB stopped printing Euros several months ago and has refused to do so.  This is why Europe is crashing.  The rapidly expanding US Dollar supply is the reason the US economy and stock market is trying to grow.  These massive opposing forces explains the incredibly large daily swings in the markets.  This high level of volatility will cause our automated forecast to occasionally flip back and forth between “growth” and “uncertain” as our stop-loss algorithm is not calibrated for such large and frequent swings.  Back in August and September we previously discussed this weakness of our stop-loss feature.

What to do?  Our automated signal switching to “uncertain” is a signal to move to a cash position or otherwise move your portfolio to a risk-neutral position.  In light of the rapid and strong expansion of the US money supply, we think the medium to long term outlook for US markets is for strong growth.  In the very short term it is a guessing game what European politicians and bureaucrats will do.  If Greece accepts the bailout without a referendum and the ECB starts printing Euros, the weakness from Europe will ease and US markets will move sharply higher, and it will happen quickly.  Given our stop-loss system’s weakness with large volatility, the fact our forecast switched based on less than one S&P 500 point, the growth pattern our forecast identified a few days ago and the technical support remaining in place (1216 – 1226) on the S&P 500, holding your current position one more day is something to seriously consider.  If you are not currently invested in the market, wait to see what happens tomorrow.  If you are invested, wait to see what happens tomorrow before selling.  Do not short this market.  If you are short, cover your short position ASAP.  These are all the reasons we can think of to ignore the automated forecast signal generated today.  You have to make your own decision.  We will continue to publish our daily forecast and provide commentary to help you decide.