For Friday, December 16, the market forecast is uncertain

We recommend selling your equity positions and holding cash, or otherwise moving to a risk-off position.  Avoid money market funds as a cash alternative due to exposure to European sovereign default risk.

Technical Comment:

The S&P 500 moved up a slight 0.32% on Thursday with volume below Wednesday and lighter than the 30-day moving average volume.  Should the S&P 500 increase on Friday by about 10 points (0.8%) our forecast could switch back to growth.

Subjective Comment:

The increase in the market index happened on lighter volume.  This is not a sign of strength.  When the market collects a series of up-days on light volume and down-days on stronger volume it is a pattern of weakness, and this is what has been occurring for the past week and a half.

The weekly US money supply statistics were published today by the Federal Reserve.  Looking at M2 (both seasonally adjusted and non-seasonally adjusted) shows no change in growth over the past 18 weeks (8 AUG – 5 DEC).  The growth rate of the US money supply has been steady for months after the summer burst of bank lending in June and July.  Looking at the required reserves, both seasonally and non-seasonally adjusted, also shows US bank lending has not increased through the first week of December.  Of additional interest are excess reserves.  They moved back up from $1.46 Trillion to $1.53 Trillion.  All of this data supports the conclusion that US banks have not increased their lending.  We continue to think US banks are holding the excess reserves and holding back on their lending as they need the extra cash as a contingency against the European debt crisis.  The data from the Fed today does not include any impact from the Dollar Swaps among the various central banks as those started on December 5th.  If those Dollar Swap loans have any impact, the first indication will be in next week’s data.

Yesterday we outlined why we are bearish on US markets in the near term, and we also provided a scenario for a turn-around in the Eurozone debt crisis.  On Thursday Spain had a bond auction that was either very successful or mixed depending on your point of view.  The successful part of the auction was that they intended to sell €3.5 billion Euros, and demand was so strong that a total of €6.03 billion Euros were raised on lower yields.  Some specific bid to cover ratios were not as strong as recent Spanish auctions, hence the contrasting opinion the auction might now have been as strong.  The strong auction view supports the bullish Eurozone scenario discussed yesterday.  Bond auctions in Europe need to be watched for continued signs of strength.  Continuing strong auctions support Robert Wenzel’s thesis at EconomicPolicyJournal.com, and bond auction information will be available sooner than Eurozone and US money supply data.

We continue to advise caution and do not recommend investing in US markets right now.  However, given the enormous amount of excess reserves in the US banking system and the medium-term bullish scenario for the Eurozone, the situation could turn around quickly.  Keep your investment funds in cash and be ready to quickly move back into the market if conditions change.

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