For Tuesday, July 3, 2012, We Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 advanced 0.25% on very low volume, lower that both the preceding Friday and the 30-day moving average volume.  The S&P 500 would have to decline about 47 points on Tuesday (-3.5%) for our automated forecast to change to an uncertain trend.

Subjective Comment:

We have made an improvement to the format of our daily posts to make our investment recommendation faster and easier to understand.  The “how to use” page has been updated to explain the new format.  Let us know what you think.

Daily market volume was incredibly small, even for a day that occurs during a holiday week.  For the Dow it was the lowest volume day in over a decade.  For the S&P 500 the last time volume was below Monday’s volume was December 26, 2003, over eight and a half years ago on the day after Christmas.  As a percentage of the 30-day moving average Monday was the lowest volume day in over fifteen and a half years.  The weak volume was near an all-time record for light volume.  After the strong-volume up-day on Friday we would normally think the holding of such strong gains to be a positive sign.  We see this absolute collapse in volume as troubling.  As patterns go, Monday was a weak-volume up-day which is a continuation of patterns typical of weak markets.  There is no technical reason to believe US markets will grow from here.

The Eurozone debt crisis continues unabated by the summit late last week.  Unemployment statistics were released on Monday showing the 17-country bloc had its highest recorded unemployment at 11.1%, the highest since the Euro was launched in 1999.  More concerning was the 24.6% unemployment in Spain with youth unemployment in Spain and Greece both at 52.1%.  The only solution for Europe is for the various over-indebted sovereigns to declare bankruptcy.  This would be painful, but it would be the least painful path to restoring economic growth and ending the depression.  Bailouts and liquidity operations by the European Central Bank (ECB) will only prolong the depression.  The ECB published updated M2 and M3 money supplies for the Euro, both growing at an annual rate of 2.9% for the month of May, 2012.  These low growth rates are elevated compared to the past three years, but not enough to ignite a bubble-boom in the Eurozone.  Money supplies should not be manipulated by central banks as this is nothing but price-fixing of interest rates which distorts the economy and creates the business cycle, as explained by the Austrian Business Cycle Theory.  The growth rate of the Euro M2 and M3 had been above 10% annually in 2007, and European bailouts of banks and countries are prolonging the depression.  This will continue to be a source of spillover volatility for US markets.  The market crash in China will get worse and could also have a spillover impact on US markets.  With the collapse of the US M2 money supply growth rate we expect a US market crash in the near future.  We don’t know when this might occur, but it is interesting that historically banking crises in the US tend to begin most often in September.

Continue to avoid all US stocks and bonds.  Hold and accumulate cash instead and avoid money market funds as they have exposure to European sovereign debt.  Hold any price inflation hedges you have for the very long term but do not add to those positions right now.

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