For Tuesday, Nov 22, 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:

Monday the S&P 500 dropped 1.9% on volume higher than Friday but below the 30-day moving average volume.  The S&P 500 index dropped below its 50-day moving average.  The S&P 500 would have to rise about 15 points on Tuesday to return our forecast to growth.  3 of the last 4 trading sessions have been down-days on increasing volume versus prior day, which is further development of patterns typically preceding further downward movement.

Subjective Comment:

The level of 1,216 – 1,226 on the S&P 500 failed to provide any support as the market moved down aggressively. Breaking this technical level is bearish.  Many market technicians follow the 50-day moving average, so they are likely to see Monday’s drop as weakness and may respond by selling, putting further downward pressure on the market.  The rapid accumulation of down-days on higher volume must be watched closely.

A bounce up is also likely.  High volatility has been the norm for the past 4 months.  Even if the S&P 500 bounces up enough tomorrow to flip our forecast back to growth, it must be considered with the daily volume.  A large up-day for the index on light volume is not bullish.  Should the markets move up tomorrow, do not rush back in.  Wait for the market to close tomorrow and look at the index motion and the daily volume.  As news of the bubble-boom from the second quarter continues to show itself in economic indicators, upward movement in US markets is possible.  Light market volume can allow for large single-day swings.

Hopefully you have already moved to a cash (risk-off) position.  If not, we still recommend doing so.  Thursday US markets are closed for the Thanksgiving holiday.  Friday after Thanksgiving the market will be open for a shortened session, closing at 1:00 pm Eastern time.  Move to cash (or risk-off) and do NOT put your money into a money market fund as those funds likely have a lot of exposure to European debt.  Once you’ve done that, enjoy your shortened work week and Holiday without worrying about the market.

In the US the Congressional Supper Committee failed to reach an agreement by Monday’s deadline.  Since the “automatic” cuts now required by law will not go into effect until 2013, we completely discount the relevance of this news to the current activity in stock markets.

What matters now continues to be European debt, both the Sovereign debt of various countries and the European banks that own it.  The best thing in the long run is to allow the necessary bankruptcies of the banks and defaults on the bonds combined with a non-inflating money supply of Euros.  Germany wants to avoid money printing, but they seem unwilling to accept the necessary defaults and bankruptcies.  Everyone else appears to want massive money printing by the European Central Bank to avoid the defaults and bankruptcies.  Will the ECB print new money or not, aka monetize their debt, aka initiate Quantitative Easing?  Call it what you like, this is the key question.  Every day of dithering on this question is another day of uncertainty.  Eventually NOT printing Euros will force bond payments to be missed, which would be a default and the beginning of a collapse.  We don’t know how close Europe is to this event, but market participants seem to be very nervous and their decisions regarding buying and selling is impacting the market.  The down-days on higher volume is the data suggesting most money is moving to safety.  If you’re interested in more details about Europe, here are some interesting links:

We continue to think US banks are anticipating the crisis in Europe and are preparing for the worst.  In addition, US banks have to worry about their own debt.  The Federal Reserve has expressed some frustration that US banks are not lending more after the burst of lending this past summer slowed.  The Fed wants more inflation, both Dollar supply inflation and price inflation.  The crisis in Europe could be used as an excuse for more Quantitative Easing by the Fed, although they may alter the program’s technical approach and call it by another name.  If this happens, it will be evident in the money supply statistics published weekly by the Fed.

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