For Thursday, August 2, 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 0.3% on Wednesday with volume above Tuesday and above the 30-day moving average volume.  Should the S&P 500 decline about 39 points (-2.9%) on Thursday our forecast could change to an uncertain trend.

Subjective Comment:

Wednesday was another strong-volume down-day, following the same occurrence on Tuesday.  The daily market data continues to show signs of weakness based on our technical analytics.  The Federal Reserve’s FOMC press release cited zero changes in monetary policy.  Thursday the European Central Bank will issue their press release with everyone attempting to guess if the Euro monetary policy will change dramatically.  If an inflationary policy is announced, European markets will likely rally and pull US markets up.  Without a change in monetary policy the Eurozone debt crisis will get worse.  Greece needs another bailout by August 20th to avoid default.  Spain has started asking for a bailout for Spanish Banks, but this is really just a bailout for Spain itself.  Italy is not far behind.  If European markets decline on Thursday, US markets will likely decline as well.

We advise staying out of the markets until it becomes clear what the central banks will do.  Statements by ECB President Mario Draghi have left everyone guessing.  The Fed seems to be unwilling to provide more monetary inflation.  US M2 growth collapsed about 4 months ago to near zero growth, but in the past two months US M2 might have resumed growing aggressively.  The data looks to have typical fluctuations, but the possibility of accelerated growth remains and has to be watched carefully.  Continue to stay out of stocks and bonds.  Tomorrow we will review the weekly US M2 data and comment on the ECB monetary policy statement.

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