For Monday, July 30, 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 1.9% on Friday with volume just below Thursday but still above the 30-day moving average volume.  The S&P 500 would have to decline about 55 points (-3.9%) on Monday to change our automatic forecast to an uncertain trend.

Subjective Comment:

Friday marked two consecutive days of very strong index growth for US markets with strong volume.  This is interesting and must be watched carefully to see if a new technical pattern begins to develop.  So far these two dramatic up-days have not formed a pattern of any predictive value and our technical assessment remains the same.  Our automatic forecast is for growth, but high volatility such as we have experienced these past several weeks and days can fool our stop-loss algorithm.  The preponderance of weak-volume up-days and strong-volume down-days remains the dominate theme, suggesting market weakness.  The prior two days might be the start of a change.

We wrote extensively about our observations regarding the US money supply following the data released from the Federal Reserve on 7/26/12.  Please see that discussion as it is not clear what the money supply is doing.  If the US money supply (M2) has accelerated then the recent upward movement in the US stock market could be sustained by another bubble-boom, but only if the accelerated US M2 growth is confirmed and sustained at a sufficiently high rate.  If US M2 remains at a the much lower straight-line annualized growth rate of 2.6% then US markets will crash in the near future.  It’s possible the past two days of market growth is a reaction to announcements by Eurozone officials and will fade quickly.  We do not know for sure, but our best guess is to assume a crash is still the most likely outcome in the near future.  For this reason we advise holding and accumulating cash.  Hold your price inflation hedges; avoid US equities and all bonds.  Research additional price inflation hedges as well.  Be prepared to change from a cash position in the near future if conditions change.  We expect in the next few weeks the US M2 growth and stock trends will become more obvious.

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