For Wednesday, July 18, 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 0.74% on Tuesday with volume above Monday but below the 30-day moving average.  A decline of about 36 points (-2.6%) on Wednesday might be enough to change our forecast to an uncertain trend.

Subjective Comment:

The advance on Tuesday for the S&P 500 should not be considered a strong-volume up-day.  While volume Tuesday was above Monday, that says more about how very light Monday volume was.  Tuesday’s volume being just below the 30-day moving average is the more telling indicator.  This continues the overall pattern of weak markets for the US.  There is no technical reason from our automated process to suggest US markets will grow.

The Consumer Price Index was updated on Tuesday.  EconomicPolicyJournal.com has a good analysis of the CPI data.  Headline CPI was unchanged and so this news got little attention.  However, here is what EPJ.com observed:

Core inflation rose at a 2.4% annual rate in June. The past year, apparel prices rose 3.9%, medical care +4.3% and the food index rose 2.7%.  The energy index fell 1.4%.

What’s going on is that the latest slowdown in [US] money printing… has pushed oil prices lower. It is also causing a slowdown in the overall economy and stock market. BUT, the previous money printing, which entered the capital goods sector is now moving into the consumer goods sector, that’s why you are seeing apparel, medical care and food prices climbing.

EPJ.com completes their comments with the same warnings about the slow-down in the US money supply growth.  EPJ.com also has this post about another economic indicator that is showing a slowdown in the economy.  The economy will contract along with a stock market decline as a result of the collapse in money supply growth.  The timing is a guess, but prior to November seems to be a reasonable estimate.  Price inflation will not be as bad as we had previously thought, but the prior money printing will cause price inflation even as the economy slows and stocks decline (a condition called “stagflation”).  Continue to hold and accumulate cash, hold your price inflation hedges and avoid all bonds.

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