For Wednesday, March 7, 2012, 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 index declined 1.5% on Tuesday with volume higher than Monday and above the 30-day moving average volume.  This is the largest single day drop since December 8th, about 3 months ago, and it caused our forecast to change to an “uncertain trend”.  To return to a “growth trend” the S&P 500 would have to advance about 16 points (1.2%) on Wednesday.

Tuesday was the second day in a row where the S&P 500 registered a strong-volume down-day, and the third such day in the past five trading sessions.  When strong-volume down-days group together in close proximity like this, it is a sign of market weakness.  We do not have a fully developed pattern with predictive value, but clearly there is weakness.  The strong volume was above the 30-day average, but it was not unusually high.  Our forecast changed based on the stop-loss algorithm which is designed as an early safety net.  It is not uncommon for large drops in the market to be followed by a bounce up the next day.  A bounce in excess of 16 points could return our forecast to growth.

Subjective Comment:

US markets opened down and declined throughout the day.  Most likely the developing Eurozone debt crisis and to a lesser extent the market decline in China are influencing US markets as we have suggested could happen.  Last fall US markets were highly volatile with single day index swings consistent with Tuesday’s drop.  The bubble-boom starting in the US back then was barely underway after the aggressive US bank lending that occurred in June and July.  The current international weakness and increasing price inflation appears to be spooking investors in the US.  What we are concerned about is how much longer the bubble-boom going on in the US can last with the M2 money supply having returned to a slower growth rate since last August.  We think the current economic bubble in the US can persist a while longer until the slowdown in M2 growth causes the bubble to pop.  We are much more certain the developing international debt and economic crisis in Europe and China will cause volatility for the next few weeks.

Our daily forecasting process is very susceptible to high market volatility.  We mentioned yesterday the market was near the stop-loss settings, and today’s decline was more than sufficient to trigger the change to an “uncertain trend” forecast.  We could see a return of our forecast frequently shifting between growth and uncertain for a while.  We recommend following our forecast and moving your investments to cash.  Remember to avoid money market funds as they are exposed to European sovereign bonds.  Probably the best play for the next two weeks is to wait out the volatility we expect to occur.  If a bailout for Greece occurs the volatility could subside and an opportunity to get back into US markets could present itself.

We have written about the pending Greek default and the Eurozone debt crisis.  Today we found this article at the Daily Reckoning, and we think it is a great description of the current situation and the motivations of the various institutions involved.  If you want to understand more about Greece and the current Eurozone situation, we recommend reading it.  We also noticed Asian equities had the biggest 2-day loss so far this year.  The problems in China continue to get worse.  Price inflation and a crashing economy are in China’s future.  These are the most likely items influencing US markets now and for the next couple of weeks.

We have one additional article to recommend.  A great description of the current boom-bust cycle in the US was published at the Ludwig von Mises Institute on Tuesday.  We frequently talk about the Austrian Business Cycle Theory (ABCT).  This article explains with examples from US history how booms and busts have occurred using ABCT.  After you have placed your sell orders with your broker to move your investments to cash, we recommend reading this article too.

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