For Wednesday, Nov 23, 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:

Tuesday the S&P 500 declined again by 0.4% on volume slightly below Monday and the 30-day moving average volume.  A large up-day is necessary to move our forecast back to growth.

Subjective Comment:

Volume this week should continue to be light because of the holiday.  When volume is light, the market index can have large swings, not to mention the large magnitude one-day swings that have occurred for the past 4 months.  Anything could happen on any given day.  Should the market move up enough to switch our forecast back to growth, we would want to see large volume along with the upward index motion as a bullish indicator.  Even so, a few bullish days in a row is worth waiting for before jumping back in.  Negative patterns continue to form and news from Europe is persistently bearish.

We have commented several times that your cash position should be outside of money market accounts due to potential exposure to European debt.  We’re happy to see this risk has been diminishing for the past few months, but we still recommend cash as the risk remains very real.  The 10 top US money market funds still had $224 Billion Dollars of exposure to European banks, which is down 42% since the end of May.  The very small interest rates offered by money market accounts are simply not worth this level of risk.

The European Central Bank’s (ECB’s) weekly limit-free funding appears to be the only funding option for many banks with 178 banks requesting €247 Billion Euros, the highest since mid-2009.  Additionally, the bond prices of several European countries are collapsing.  Austrian, Belgian and Broad European bond yields are all going upThe Spanish bond yield curve inverted the most since 1994.  Germany’s Commerzbank appears to be very undercapitalized and near insolvency, and the Belgian bank Dexia’s  bailout deal might collapse.  Investors are searching for someplace safe to park their money, and apparently US bonds are seen as such a safe haven (for now).  We say this because the US Treasury saw record bond sales Monday and Tuesday with so much demand that $35 Billion of 5-year bonds priced below 1% yield for the first time ever.  There was news that the International Monetary Fund (IMF) approved a credit line to provide liquidity in Europe, but the amount was only equivalent to $91 Billion US Dollars.  While any individual person would love to have that much money, it is just enough to fund Italy and Spain for 2 months.  This is just a sampling of the news that suggests the European debt crisis is indeed getting very bad.

Things in the US are not as bad as Europe, but there appears to be very real fear about the consequences of defaults in Europe.  Late Tuesday afternoon the Federal Reserve announced it is launching its 2012 bank stress test which, unlike previous tests, might require US banks to raise capital.  One of the test scenarios includes a deterioration of the European crisis.  We think this confirms our previous speculation about US banks holding back their excess reserves as a contingency, and that’s why they reduced originating new loans after the two months of aggressive lending last summer.  It appears everyone is preparing for a European crisis event.  Our best guess is the crisis event will happen, and probably soon given the developing bearish pattern on the S&P 500.  We think money printing will ramp up by the ECB, but not in time to avoid some defaults.  The defaults will trigger other events and things will happen quickly.  US markets will take a hit, but how hard and for how long is anyone’s guess.  The Fed probably responds by printing large amounts of Dollars to try and keep the most recent bubble-boom going.  The spurt of US bank lending a few months ago did not continue long enough to overcome the downward pressure from Europe.  For many weeks we wrote the expanding Dollar supply in the US would overcome the European debt crisis.  We now have our doubts as the expanding M2 money supply clearly slowed.

Move your investments to cash, and this means CASH outside of mutual funds.  If you have investments locked up with limited options in a 401k or other retirement plan, you might not be able to move to cash other than a mutual fund.  If that’s the case, we suggest a risk-off position.  If you’re holding an unleveraged index fund tracking the S&P 500, you can invest in an inverse index fund elsewhere to off-set this position.  For example, if you have $10,000 in your retirement account with an unleveraged index fund, you can use $3,333 of non-retirement funds to purchase an inverse, 3x leveraged index fund.  This achieves a risk-off position where the gains in one account off-set the losses in the other.

One Response to For Wednesday, Nov 23, the market forecast is uncertian

  1. Very nice article and straight to the point. I am not sure if this is actually the best place to ask but do you people have any thoughts on where to hire some professional writers? Thx 🙂