For Wednesday, June 6, 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 0.6% on Tuesday with volume below Monday and lighter than the 30-day moving average volume.  The stop-loss algorithm in our forecasting process remains triggered, and this is why we’re forecasting an “uncertain trend”.  On Wednesday and advance of about 7 points on the S&P 500 (+0.6%) could be enough to flip our forecast back to a growth trend.

Subjective Comment:

On any day the stock market can bounce up or down.  What matters is the trend, and the current trend for US markets will not change and move up.  The upward motion on Tuesday was on much lighter volume.  The pattern of weak volume on up-days and strong volume on down-days continues.  The Wall Street Journal published another article discussing what the Federal Reserve might do and implied additional quantitative easing or other injections of liquidity could be announced at the next Federal Open Market Committee meeting on June 20th.  Speculation about Fed actions can have an impact on the market for a day or two, but until actual action occurs any such speculation will not sustain a market rally.

Continue to watch the US money supply growth rate.  This will be the best predictor of what will come.  The slowing growth over the past 5 weeks is very significant because it follows almost 10 months of 7%+ annualized growth.  Last summer the US banking system accelerated origination of new loans.  That grew the money supply at 25% annualized for 2 months in June and July last year.  This year the money supply growth is near 0%.  When money supply growth accelerates a bubble boom is created in the economy and the stock market.  When the growth rate slows the bubble pops.  It is not clear if the end of the current mini-bubble-boom will be a stagnating, sideways movement of markets or a decline.  We are certain US markets will not grow from here.

Continue to accumulate cash and maintain a risk-off position relative to US equities.  Avoid all bonds and hold any price inflation hedges you own.

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