For Monday, April 16, 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 index declined 1.25% on Friday with volume above Thursday but below the 30-day moving average volume.  The decline was sufficient to again trigger the stop-loss algorithm in our automated analysis and this changes our forecast to uncertain.  An advance of the S&P 500 index on Monday of about 2 points (+0.2%) would probably change our forecast back to growth.

Subjective Comment:

Friday market volume is typically lighter that the other days of the week, so the increasing volume over Thursday combined with the large index drop made Friday a strong-volume down-day.  This past week saw 3 out of 5 trading sessions end as strong-volume down-days, combined with weak-volume up-days.  Following the strong-volume down-days that occurred late the prior week, we have now seen the complete formation of one of the patterns our automated system is programed to detect.  The pattern that has now formed has a consistent history of a 50% / 50% in predicting growth or decline.

At first this might sound as if we are uncertain regarding the future direction of the stock market and call into question how this pattern is any different from the “uncertain” forecast we have identified several times over the past two weeks.  Prior to the formation of this pattern our “uncertain” forecast came completely from the stop-loss algorithm in our process.  Now our process has also identified another technical indication of uncertainty.  Sometimes during a growing market a short correction can occur and create a false-positive in our stop-loss algorithm.  We now have a situation where after months of a growing market we have the formation of a 50-50 pattern.  On average this pattern occurs just under 5 times per year, and it has been about 8 months since it last formed.  When the pattern last appeared the market had been down and sideways, and then proceeded to grow.  Now we have the pattern following months of growth.

Our concerns about the US money supply growth rate remain unchanged from Thursday.  We encourage you to read our previous post for a full description of these concerns and our subjective opinion which remains unchanged.  Our recommendation for US equities is risk-off.  Sell any bonds you have as price inflation will eventually get worse and drive bond prices down.

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