For Friday, March 23, 2012, the market forecast is uncertain

Technical Comment:

The S&P 500 declined 0.7% on Thursday with volume higher than Wednesday but below the 30-day moving average volume.  After 3 straight days of decline the market has returned to where it was following the large advance of Tuesday last week (3/13/12).  Thursday’s decline was sufficient to trigger the stop-loss algorithm within our automated process, so our forecast has changed to an uncertain trend.  If the S&P 500 advances about 1 point on Friday (+0.1%) our forecast will likely return to a growth trend.

Subjective Comment:

Thursday’s decline for the S&P 500 qualifies as a strong-volume down-day since volume was above Wednesday.  However, volume was below the 30-day moving average and the index has still retained most of the strong gain from Tuesday last week when a predictive pattern of growth occurred.  Our forecasting process reasonably minimizes false signals, but it is not perfect.  Since volume was below the 30-day moving average and the index remains near the growth breakout point from last week, it is possible Thursday is a false signal.  The counter argument is to recognize the decline of 0.7% was quite a bit and volume was stronger than the prior day.

Every Thursday the Federal Reserve updates money supply statistics and we have analyzed them carefully.  US M2 continues to grow at the same straight-line rate of 7% (NSA) and 3.5% (SA).  Both Seasonally Adjusted and Not Seasonally Adjusted M2 series have reached record highs for the prior 2 weeks, exceeding $9.8 Trillion Dollars.  We thought there might have been a leveling-off occurring in M2 (NSA), but the new record highs resulted in no special-cause variability in the statistical process control we use to identify possible trend changes.

The biweekly update of the Bank Reserves was also updated, and it shows something interesting.  Required Reserves (NSA) might be declining.  The most recent data did drop, but the drop does not cause a special-cause variation on the control chart and could be statistical noise.  The Excess Reserves have declined again, but this could also be statistical noise.  If excess and required reserves are truly declining, this could be an early signal of a slowing loan origination rate by US banks.  That would eventually result in a slowing of the money supply growth and put the current bubble-boom in the US economy and stock markets at risk.  This needs to be watched carefully.  Unfortunately it will be two weeks before the next update is available.  Since the data remain within the control limits, we cannot yet consider this to be a signal.

Recommendation:

We continue to recommend selling all bonds, including TIPS.  We also strongly encourage investing in hedges against price inflation as the growing US money supply will cause price inflation to get worse than it already is.  As for investing in leveraged index funds that follow the US stock market, our official forecast is an uncertain trend but we recommend holding your positions for now.  If you have money you want to invest, find the inflation hedge best suited for your situation instead of adding to leveraged index funds.  We think it is highly likely US markets will move higher again in the next few days and cause our forecast to return to a growth trend.  Check our daily updates as we will reevaluate our opinion should a strong decline occur.

China Update:

Yesterday we mentioned that China is likely to see its economy and stock market crash in the near future.  Data out of China is highly manipulated by the government, but even so the data are showing the signs of stress, including an accelerating rate of contraction based on 5 successive months of decline in the manufacturing sector.  There are even unconfirmed rumors of an in-progress coup.  There has been civil unrest and high rates of price inflation in China.  Historically such high rates of inflation combined with unemployment and unrest has led to revolutions in other countries.  The recent decline in the Chinese stock market is even thought to be the trigger for the recent slide in European and US stocks among some commentators.  This is why we mentioned the possibility of Chinese economic problems causing problems in US markets.  Some market participants assume world economies are so interconnected that problems will spread.  There is some truth to this, but economics is much more complex than such a simple explanation.  China has been printing money for years at an incredible pace, and now they have slowed the printing presses down to combat price inflation.  Austrian Business Cycle Theory (ABCT) explains what will happen next, and that is the crash-phase of the business cycle.  The US resumed the boom phase of the cycle when bank lending rates soared last summer.  Chinese problems will spill over a bit, but the US money supply growth rate will drive the US bubble-boom forward with only minor hiccups from China.  The only way the US bubble-boom ends is when our money supply growth rates slow.

One final thought for this post.  We in no way advocate or support money printing by central banks, including the US Federal Reserve.  When we comment on money printing, including digital money creation, we are describing what we think will happen based on our understanding of ABCT.  The many negative consequences of monetary and price inflation far outweigh any supposed benefits.

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