For Monday, Nov 21, the market forecast is uncertian

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 closed on Friday down just a tiny fraction of 0.04%.  It had been down more than where it closed and was only briefly in positive territory.  Volume was lower than Thursday and below the 30-day moving average.  The S&P 500 would have to go up about 15 points (1.2%) on Monday to cause our forecast to return to growth.

Subjective Comment:

The level of 1,216 – 1,226 on the S&P 500 continues to be tested.  Friday’s close was 1,215.65 which is barely below this level of support.  For a technical level of support to be considered broken usually takes a larger magnitude, although this is a subjective point.  Since 1,215.65 rounds up to 1,216, we’re considering the support level still in place but under pressure.

The US money supply (M2 seasonally adjusted) has been growing at a steady rate of $8.9 Billion per week for the past year with the notable exception of June and July 2011.  Those two months the money supply grew at $56.9 Billion per week.  Now that second quarter business results and economic indicators are available it is becoming obvious the impact this burst of bank lending has had on the US economy.  Here are some examples (hat tip

Why is our economy doing so well? …Europe has been doing something very close to imploding for months now. So just as our financial crisis sent Europe into a tailspin three years ago, you might expect that the possibility of a partial or complete break-up of the Eurozone would have American businesses taking a chainsaw to their workforces and households stuffing their paychecks under the mattress in the expectation that 2012 will be a lot like 2009. And yet none of that is happening.

Houston-area employers created 79,500 jobs over the past year – a number so robust that it drew skepticism from an economist who has studied the region for decades.   ”That is getting close to what you can say is a boom,” said Barton Smith, professor emeritus of economics at the University of Houston.

New-vehicle retail sales are experiencing further recovery and strength through the first half of November, according to a monthly sales forecast developed by J.D. Power and Associates Power Information Network® (PIN) and LMC Automotive.

Austrian economics has a robust theory of the business cycle that explains how the expanding money supply fuels the bubble-boom in any economy.  The increased growth rate of the M2 money supply in the US caused the 2nd quarter to boom.   These bubble-booms do not last.  They are the cause of the bust and following recession because the boom is in businesses and projects that would never have been initiated if not for the artificially low interest rates caused by the expanding money supply.  The Austrian Business Cycle Theory (ABCT) also explains when the money supply growth stops or slows, the bust will soon follow.  This is why we are concerned about the drop of the M2 growth back to $8.9 Billion per week for the past 3.5 months.

The Eurozone went through a period of monetary expansion and now the European Central Bank (ECB) has been holding the growth rate of the Euro supply to very low levels.  The previous Euro expansion caused a bubble-boom just as ABCT explains.  Now that the Euro supply growth rate has been held at near zero for many months the Eurozone economies are crashing.  The Sovereign Debt crisis in Europe has been playing out for quite a while with a lot of attention grabbing headlines over the past 4 months.  The US bubble-boom was happening at the same time.  These two coincident forces are the cause of the large volatility in US markets.  We have suspected the Dollar growth rate would accelerate again with bank lending as the economic indicators in the US improved.  We also though the ECB would begin rapid printing of new Euros this month under the leadership of their new President.  Now we are seeing a delay by the ECB.  They are not printing Euros in the magnitude necessary to significantly delay the Eurozone recession.  At the same time bank lending in the US has not resumed the rapid pace of this past summer.  We are now speculating US banks have slowed lending to hold excess reserves as a contingency against European sovereign defaults.  If this is the case, and if this situation persists, the Eurozone crisis will get much worse before it gets better.  There is one theory that the ECB is deliberately delaying money printing to use the crisis to achieve a political agenda.  Regardless of the motivations, the crashing Eurozone combined with a slowed Dollar expansion is hindering the growth we had been expecting in US markets.

Our forecast is “uncertain” because the S&P 500 has dropped below our stop-loss trigger.  Friday did not bounce back up and restore our forecast to growth.  This further confirms what we wrote in our last post about this stop-loss trigger being different than the other two back on November 1st and 9th.  Market volume has been very low for the past three weeks.  A strongly growing market would have more volume.  Caution is clearly warranted right now.  Consider holding cash (or a risk-off) position until the Eurozone crisis is clearly resolved, either by massive Euro printing or a major change in the European Monetary Union.  Avoid money market funds as they have exposure to European debt.  Our forecast will likely bounce between growth and uncertain if market volatility remains high.  The money supply growth of Euros and Dollars combined with the understanding of ABCT will explain what will eventually happen.  Right now we are in a turning point while market participants wait to see what will happen.  Most do not understand ABCT and the impact the money supply has as the driving force of the bubble-booms, so they could take actions that further magnify market volatility.  We will continue our posts every day US stock markets are open along with our automated forecast.

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