For Friday, May 11, 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 0.25% on Thursday with volume below Wednesday and lighter than the 30-day moving average volume.  The stop-loss algorithm remains in a triggered state and keeps our automated forecast at an uncertain trend.  The S&P 500 would have to advance about 11 points on Friday to reverse the trigger and return our forecast to a growth trend.

Subjective Comment:

After two days of strong-volume declines, the S&P 500 registered a weak-volume up-day on Thursday.  This is a weak pattern inconsistent with market growth.  A fully formed predictive pattern has not formed but has begun.  Our technical analysis remains unclear regarding the future direction of US stock markets.

We analyzed the weekly update of the US money supply published by the Federal Reserve.  Last week we noted a decline of $137 Billion Dollars in US M2 (not seasonally adjusted) for the week ending 4/23.  For the week ending 4/30 US M2 (NSA) declined again, this time by $49 Billion Dollars.  More significantly we track the residuals of the straight-line curve fit using a control chart, and we now have two consecutive weeks of an out-of-control condition.  After 37 weeks of in-control conditions we are seeing continued development of weakness in the growth trend.  Last week is was the moving range that went out-of-control, and this week it is the residual that is out-of-control.  The purpose of a control chart is to spot a change in trend early.  Control charts can sometimes give a false signal, but two consecutive signals of a change is much more concerning than a single point.  The long-term trend remains at an annualized growth of 6.6% to 7.1%, but those trends include much of the data from the past 9 months.

The recent contraction in the US M2 (NSA) money supply combined with our automated forecasting process is a very negative situation for continued growth.  For the near future we predict US markets will continue to move sideways or they will decline.  Growth is only possible if the money supply grows first, and that is currently not happening.  The Federal Reserve and private US banks have the power to increase the origination rate of new loans and cause the money supply to grow rapidly.  Things could change quickly, but if Banks take action it will take a little time for the market to respond.  Hold cash or a risk-off position for the time being.  If our forecast returns to growth please read our comments should that happen.  Market volatility and sideways movement can confuse our stop-loss algorithm, and if that happens we will comment on it.