For Friday, July 6, 2012, We Recommend Against Investing

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

Technical Comment:

The S&P 500 declined 0.5% on volume higher than Tuesday but below the 30-day moving average volume (see note).  A very large decline of about 44 points (-3.2%) on the S&P 500 would be necessary on Friday to change our automated forecast to an uncertain trend.

Note: The S&P 500 daily data feed continues to demonstrate exceptionally low volume and errors in the Adjusted Close values.  These data are changed after the next trading session, indicating data errors are getting fixed a day later.  This has forced us to shift to an alternative data feed and consequently estimate the 30-day moving average volume.  This is currently not having any change on what our automated forecast produces, but it does open up the possibility of data errors affecting the automated forecast.  This is a minor problem and does not have any impact on our subjective recommendation.

Subjective Comment:

Thursday could be considered a strong-volume down-day, but the volume comparison of Thursday to the pre-holiday shortened trading session on Tuesday is not a good comparative data point.  We place no interpretive significance to the daily S&P 500 data from Thursday.  The on-going trend in the data continues to suggest a weak market and growth is not expected from the technical analysis.

The US M2 money supply data weekly update was published on Thursday, and the growth rate continues to be near 0% for the past 16 weeks.  While other central banks around the world (Europe, Great Brittan and China) all announced changes in their monetary policies there has been no change in the position of the Federal Reserve or in the money supply data trends.  The monetary changes were accommodative, but the ECB and the PBOC both failed to make enough of a change to impact the on-going debt problems in both regions.  The Bank of England announced an expanded Quantitative Easing program that will create more price inflation and could give their economy and stock market a bit of a bubble-boom lift.  We’re not following Great Brittan closely enough to really comment.  The problems in the rest of Europe and China are not “solved” and we expect spill-over effects to influence the US market in the very short term.  A crash in China or Europe, both likely, could trigger a crash in the US.

The US stock market (and economy) is experiencing the end of a bubble-boom that was ignited a year ago.  Prior to 16 weeks ago the US M2 (not seasonally adjusted) money supply had been growing at 7.5% annualized for about 9 months.  The most recent 16 weeks (3.5 months) have seen a collapse of the money supply growth rate to ZERO percent.  We have likely reached the point where a market decline is unavoidable, even if the Fed or US Banks were to suddenly accelerate the growth rate.  It is very difficult to guess at the timing of a crash based on money supply growth rate changes.  It is possible the quarterly reporting requirements of US corporations can impact layoff decisions and bankruptcy filings.  If this is the case, watch for corporate announcements in the next few weeks for clues of what might be coming.  If the US M2 (NSA) growth rate remains near 0% and a crash does not happen in the next few weeks, then the next quarter point is probably when it will occur.  This would mean late September or early October.  Again, we emphasize the timing is our best guess and is difficult to predict with any accuracy.  For a better idea of timing we rely upon our automated forecast and will comment if predictive patterns appear in the daily S&P 500 data.

Continue to avoid US stocks and all bonds.  Accumulate and hold cash to protect your wealth against a market decline.  Hold your price inflation hedges for the long term and be prepared for volatility in the near term.