For Tuesday, July 31, 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 0.05% on Monday (less than a point) on volume below Friday and below the 30-day moving average volume.  If the S&P 500 were to decline about 54 points (-3.9%) on Tuesday, our automated forecast could change to an uncertain trend.

Subjective Comment:

Monday’s US market data shows a minor decline on light volume.  Following two days of strong volume advances last week, the unchanged market on light volume can be seen as consistent with a strengthening trend.  It is still much too early to conclude US markets have changed to an upward trend based on the technical signals from our forecasting process.  The overwhelming majority of the recent months have been weak market patterns.  When the market bottoms the following up-trend can be difficult to accept emotionally.  The history of weakness can overwhelm human judgment when things change, so we are trying to remain objective.  The past few days can be interpreted as the initial formation of a new up-trend.  We will watch this closely to see if a pattern with predictive value fully forms.  We remain very cautious and are not recommending a change in our advice at this time.  We continue to recommend against investing.  Hold and accumulate cash, but be prepared to make changes to your portfolio.

Of interest this week are the meetings of the European Central Bank and the Federal Reserve’s FOMC.  These meetings and the announcements that will come could cause market participants to speculate and then react.  Ignore what the central bankers say.  They attempt to “instill confidence” when they speak.  Instead watch how the change the money supply and interpret those changes using Austrian Business Cycle Theory.  The Euro money supply growth rates for June 2012 have been published.  Euro M2 is growing at 3.0% and Euro M3 is growing at 3.2%.  These rates are increasing compared to the monthly updates published since late 2009, but they remain very small compared to the history going back to 2006.  The collapse in the money supply growth rate since 2006 combined with the massive amounts of debt the Eurozone governments have amassed is why there is a debt crisis.  ECB President Mario Draghi said last week the ECB would support the Euro, but until the Euro money supply grows more rapidly, his talk is not consistent with his actions.  Unfortunately the ECB money supply numbers are published monthly, and only then with a month lag.  Still, this should be enough notice to identify a change in trend with a relatively quick advantage compared to how fast the overall economy and market would respond.  In the US the Fed publishes money supply numbers every Thursday.  We are watching this carefully for any possible change.

The ECB and Fed announcements this week could cause markets to explode one way or the other depending on what is said.  If the Fed does what the ECB recently did and lowers interest paid to banks for excess reserves, the result could be highly inflationary for the US money supply.  Then again, if US banks respond like European Banks did, the excess reserves might simply earn less interest and remain as excess if banks refuse to lend.  Watch the news carefully and remember to follow the money supply data.  The latter part of this week could be very volatile for US and European markets.  We advise against guessing and just hold your cash to protect against downside risk.

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