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MLR - June 1, 2011

The market has failed to make any headway in reversing the steep sell-off that began this morning and closed roughly at its lows for the day. What we find to be even more ominous here is the fact that volume picked up sharply on both the NYSE and NASDAQ exchange, and volume was higher than even yesterday's abnormally high volume that was 59% above-average on the NYSE and 27% above-average on the NASDAQ. Normally such action yesterday would have been very constructive for the market, but the fact that it took place on the last day of the month made it look like window-dressing. Today's high-volume sell-off indicates to us that institutional money is at work here.

Technically, today's action brought the S&P 500 and the NASDAQ Composite Indexes back down below their 50-day moving averages, snuffing out the market's attempt to move back towards its mid-April highs. Some leading stocks, such as VMware, Inc. (VMW) also showed negative action after first breaking out to new 52-week highs, another negative sign for the general markets.

Gold managed to close up just slightly, holding in the green and closing up a couple of dollars by the closing bell for stocks. For now investors should exercise caution as the action today was quite negative, if not outright ugly! A turnaround in stocks would be healthy to see, but this didn't happen and instead the market's message for now is to be cautious as further downside becomes a sharp probability. We still favor gold here, and the fact that it did close up is positive for the yellow metal on a technical basis, but a sharp sell-off in stocks could cause gold to pull back. Long-term we remain constructive on gold and silver until something material changes.

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