For Thursday, July 19, 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 0.67% on Wednesday with volume above Tuesday and higher than the 30-day moving average.  The S&P 500 would have to decline about 43 points (-3.1%) on Thursday to change our forecast to an uncertain trend, so a change tomorrow is unlikely.

Subjective Comment:

Wednesday is fairly classified a strong-volume up-day.  This is the type of daily action that occurs when markets are growing.  However this is the first such day in a while, and such days have been exceedingly rare for the last 2 to 3 months.  If Wednesday is the turning point for an up-trend then a pattern will develop over the next few days.  So far this is not a reason to change your investment positions.

We still are recommending against investing despite the growth forecast of our automated process.  In the past 6 weeks since the first of June there has been an up-trend in the S&P 500 which we have consistently warned is unsustainable based on our subjective interpretation of the US M2 money supply and our understanding of Austrian Business Cycle Theory (ABCT).  We continue to have this opinion and advise holding and accumulating cash.  US economic indicators show a slowing economy and the M2 growth rate remains near zero percent after several years of growth.  This means the bubble-boom will end and US markets will decline.  Timing is the only unknown.

We are not the only source of information warning against investing based on ABCT and the money supply.  We provided links in yesterday’s post worth reading and today we suggest the following additional reading.  We think you’ll find both of these articles at Zerohedge.com insightful and consistent with the opinion we’ve been sharing for about the past 2 months.  If the US money supply resumes rapid growth sometime very soon, the bubble-boom could resume and the crash could be delayed.  These articles offer opinions regarding this eventuality.  We will continue to watch the money supply data and try to avoid guessing what the Fed might do.

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