For Wednesday, August 8, 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 0.5% on Tuesday with volume above Monday and higher than the 30-day moving average.  The S&P 500 would have to decline about 43 points on Wednesday (-3%) to trigger the stop loss algorithm in our automated process.  That would change our forecast to an uncertain trend.

Subjective Comment:

The S&P 500 advance on Tuesday was on strong volume.  We are watching the current market growth with keen interest from a technical perspective because of the growth pattern recently identified by our automated technical analysis.  The strong volume on Tuesday was just barely above the 30-day moving average, so we are not ready to conclude from the daily data that the recent up-trend has the potential to continue growing.

We think market participants are speculating the European Central Bank might be about ready to initiate Euro printing to help the over-indebted Eurozone nations.  If enough Euros are created fast enough the defaults could be postponed into the future and Eurozone markets could rally.  However, this would cause a lot of price inflation in the Eurozone.  If this happens, there will be some spillover that would lift US markets.

US markets will not see sustained growth if the US M2 money supply growth remains below the 7% annualized range.  In fact, at the current 2.6% annualized growth for the last 4 months after a year at over 7% growth, US markets are heading for a crash.  The Fed or US Banks could cause US M2 to rapidly grow at over 25% or greater.  US Banks accelerated lending a year ago and achieved a growth rate just under 25%.  If the ECB starts printing Euros rapidly, US Banks might respond by accelerating loans.  This is all speculation on our part.  It is just as likely the Euro and Dollar supplies will continue their very slow growth and markets will crash.  It is very risky to guess which way markets will go from here.  Our advice is to wait until it becomes more obvious which directions the markets will go.  Once this is obvious, there will be time to go long or go short and profit.  Until then continue to accumulate cash and hold your price inflation hedges for the very long term.  Avoid all bonds.  If you own bonds, sell them.

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