For Thursday, April 12, 2012, the market forecast is uncertain

Our forecast for US stock markets is an uncertain trend.  If you choose to liquidate and hold cash, please avoid money market funds as they have exposure to European sovereign default risk.

Technical Comment:

The S&P 500 advanced just over 0.7% on Wednesday with volume lighter than Tuesday and below the 30-day moving average volume.  Should the S&P 500 advance again on Thursday about 5 points (0.4%) our forecast could return to a growth trend.

Subjective Comment:

It is not uncommon for the stock market to bounce up after a decline.  Was Wednesday’s climbing market a resumption of the bull trend?  Perhaps, but we advise against getting back into the market yet.  The market did not regain all of Tuesday’s loss, and the advance was on weak volume.  A sustainable up-trend typically occurs where up-days have strong volume and down-days have light volume.  The past two weeks have been the exact opposite, which indicates market weakness.  It is also telling that Wednesday’s action was up, but the close was not at session highs.  By itself this means little, but when combined with the recent patterns it is troubling.

The market opened strong, so it is likely financial news from Europe had some impact on US markets on Wednesday.  Spain and Italy had generally healthy auctions of government debt, but these were the sale of bills that mature in less than a year.  Any Eurozone debt sold prior to the maturity of the European Central Bank’s massive LTRO loans back in January and February are going to be safe investments for European banks.  Short-term debt will mature and banks think they will get their money back before they have to repay the LTRO loans.  Short-term debt auctions will continue to do well in Europe.  The long-term debt that matures beyond the LTRO is where the better indication of Eurozone financial health can be assessed, and that is not as healthy.

Another interesting note was Wednesday’s speech by Fed Vice Chairman Janet YellenAs we discussed yesterday there are lot of Fed speeches this week.  We’re very skeptical of anything Fed officials say as they are notorious for obfuscation and deception.  However, Fed watchers have noted a consistent tendency for Janet Yellen’s remarks to be highly consistent with what the Fed eventually does.  Evidently she lacks the wit necessary to be deliberately ambiguous.  In her comments she indicated the near zero interest rate policy (ZIRP) will continue until late 2015.  The Fed has previously said ZIRP would continue until late 2014, but Vice Chairman Yellen comments were the first indication the low interest rate policy would persist into late 2015 (hat tip ZeroHedge.com).  As price inflation gets worse, causing interest rates to go up, the Fed will have to print a lot more money to keep interest rates down.  This will only make price inflation worse and could well fuel another bubble-boom.  Fed money printing is always bad, but US banks can also accelerate the money supply growth should they choose to accelerate originations of new loans.

Continue to maintain a risk-off position as it is not clear what direction the market will move.  If you haven’t already done so, sell all your bond holdings (including TIPS) and avoid bonds as they will fall in price as price inflation gets worse.  There are rumors the US Treasury is preparing to offer floating interest rate bonds (Floaters) in anticipation of declining interest in bond purchasing by the public.  Pimco, one of the largest investors in bonds, has been liquidating their positions.  Additionally, the US Social Security system is now paying out more benefits than it takes in.  To do this the Social Security trust fund is cashing in the Treasury bonds they own, putting further downward pressure on bond prices.  All bonds should be considered an absolutely toxic investment.  If you want a place to invest part of your portfolio, we encourage you to research investments that hedge against price inflation.

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