For Monday, June 4, 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 a very large 2.5% on volume above Thursday and stronger than the 30-day moving average volume.  On Monday the S&P 500 would have to advance about 16 points to undo the trigger of our stop-loss algorithm and turn our forecast back to a growth trend.

Subjective Comment:

The accumulation of strong-volume down-days continues.  Of the four trading sessions in this past week, the prior 3 days have each been a strong-volume down-day with volume higher every day.  When several such days occur close together it is an additional sign of market weakness.  There is clearly a down trend and the technical weakness in US markets shows no reason to expect growth.

The Eurozone debt crisis continues to make headlines and is now part of the political discussion.  The problems in China also are making headlines more frequently.  These problems will put downward pressure on US stocks in the short term.  This combines with the dramatic slowdown of the US Money Supply growth rate (discussed here and here).  Market volatility is common during down trends, and volatility causes our stop-loss algorithm to create frequent false-starts.  This is likely to happen over the next several days and perhaps for a few weeks.  Should the Eurozone politicians convince the European Central Bank to begin massive money printing, the problems can be pushed off into the future and current market conditions could stabilize.  If economic conditions in the US get worse, which is likely given the weak job growth, the Federal Reserve could launch another round of Quantitative Easing.  QE3 and ECB money printing would be very price inflationary.  If money printing is done fast enough, bubble booms could resume.  Since these decisions are political, and politicians want to get reelected, a resumption of money printing is a real possibility.  When that might happen is a guessing game.

Continue to track the US money supply.  This is the best predictor of how the economy, US markets, and price inflation will respond to decisions made by the Federal Reserve.  For now, continue to hold and accumulate cash.  Hold your price inflation hedges and avoid all bonds.  You must decide what is best for your circumstances and portfolio holdings.  We hope you find our advice useful.  Please consider recommending us to your friends and giving us a thumbs-up “like” on Facebook.

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