For Tuesday, August 7, 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 0.23% on Monday with volume below Friday and lighter than the 30-day moving average.  If the S&P 500 declines about 42 points on Tuesday (-3%), our automated forecast would likely change to an uncertain trend based on our stop-loss algorithm.

Subjective Comment:

The S&P 500 advanced a bit Monday, but volume was weak.  European markets continued their rally on Monday with Spanish and Italian short-term bond yields dropping.  This could be in response to the recent speculation that the European Central Bank will begin a Quantitative Easing program or perhaps another Long Term Refinancing Operation.  If the ECB starts printing Euros aggressively the Eurozone markets could boom.  The spillover of any Eurozone rally would be minor and short if the US M2 money supply continues it very slow growth of 2.6%.  The US economy and stock markets will crash in the near future as long as US M2 remains below 7% range, regardless of what happens in Europe.  Our best guess on timing of the US market decline is within the next 1 to 3 months.  Any sudden change in US M2 growth, if of sufficient size, could delay the US crash and possibly extend the mini-bubble-boom that has stalled.  Despite our growth forecast from our automated technical analysis, we continue to advise caution because of the money supply.

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