For Friday, April 6 and Monday, April 9, 2012, the market forecast is uncertain

Our forecast changed to an uncertain trend for US stock markets.  If you choose to liquidate and hold cash, please avoid money market funds as they have exposure to European sovereign default risk.

Technical Comment:

The S&P 500 declined less than a point or -0.06% on Thursday with volume below Wednesday and lighter than the 30-day moving average volume.  Our forecast for US markets remains uncertain.  If the S&P 500 advances about 0.3% on Monday our forecast could return to a growth trend.  The market is closed Friday, April 6th in observance of Good Friday.

Subjective Comment:

After two consecutive strong-volume down-days, the S&P 500 declined a small amount on light volume.  This means the negative pattern that has begun remains incomplete.  The slight decline in the market kept our automated forecast below the stop-loss safety trigger.  An advance Monday will likely return our forecast to a growth trend.

The weekly US money supply statistics were published today (data) and here is our analysis.  US M2 (Not Seasonally Adjusted) continues to ascend with an annualized rate of 7% as measured by the straight-line curve fit beginning early last August.  This growth rate has remained very constant after a 25% annualized growth that occurred in June and July last summer.  Prior to the 25% rapid acceleration of M2 (NSA) the growth rate was just under 7% going back to June 2010.  It was the 25% growth spurt that has caused the current US bull market and economic up-tick.  All of this monetary expansion will continue to drive up price inflation as well.

We also looked at the biweekly update of depository institution reserves (data).  It appears Required Reserves have leveled off and are no longer growing as of late January this year.  It will take some more data to confirm the slowdown, and visually the NSA reserves might even be declining.  Required reserves of US banks grow when more new loans are being originated and shrink when loans are paid off faster than new loans are created.  This change in trend is troubling because it implies US banks have slowed lending.  This is a possible early indication that the M2 money supply growth rate will slow too since the fractional reserve money multiplier from bank lending is one of the major causes of money supply growth.  Excess reserves dipped a little and are now just under $1.5 Trillion Dollars, but the trend for excess reserves is basically flat since late October last year.  With so much excess reserves the US banks could collectively initiate very rapid expansion of the money supply if they aggressively resume lending, but they have not done so since last summer.

Austrian Business Cycle Theory (ABCT) explains what happens when the money supply growth accelerates and then slows.  The acceleration causes the business cycle to begin with the commensurate uptick in economic activity occurring first in businesses engaged in long-lead-time work, such as building production goods.  (Perhaps you have observed the resumption of housing construction.)  Price inflation picks up and eventually the money works itself through the economy to businesses that produce consumer goods.  This also causes commodities and stock prices to advance, and then price inflation heats up (as is becoming more obvious).  All of this has been happening since last summer.  This is the bubble-boom phase of the cycle.

The slowing of the money supply growth rate will eventually be followed by the crash or pop of the bubble.  Stock prices fall, businesses lose money and some go bankrupt.  This has not happened yet but eventually will.  The continued 7% growth and now the slowing of bank lending, as inferred from the slowing of required reserves, suggests the current expansion will end.  When we combine these observations with our automated forecast, we feel compelled to advise caution.  The growth of the money supply has so far fueled a bubble-boom and bull market in US equities and bank lending rates could explode at any moment, but the potential for accelerated money growth has not occurred. Consider reducing your exposure to the US stock market if the market continues to decline.  All of the digital money printing will cause price inflation, so we strongly encourage you to sell all your bonds and research investments that hedge against price inflation.

2 Responses to For Friday, April 6 and Monday, April 9, 2012, the market forecast is uncertain

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