For Friday, July 20, 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 0.3% on Thursday with volume above Wednesday and higher than the 30-day moving average.  The S&P 500 would have to decline about 44 points (-3.2%) on Friday to change our automated forecast to an uncertain trend.

Subjective Comment:

Thursday was the second day in a row with a strong-volume combined with an advancing index.  This still does not make a pattern predictive of growth, but it means the market needs to be watched carefully for signs of strength.  So far our technical analysis still shows the market to be weak and unlikely to grow.

The US M2 (Not Seasonally Adjusted) money supply went above $10 Trillion for the first time for the week of July 9th, 2012.  With this advance the straight-line annualized growth rate over the past 18 weeks (4 months) is now 2.0%.  This is still far below the 7%+ growth rate that had persisted for the 10 months preceding March 2012.  Based on our control chart this up-tick in the money supply represents common cause variation and is nothing special.  Austrian Business Cycle Theory continues to predict the US economy and markets will crash as a result of this slow-down in the growth rate of the money supply.

It is important to note the M2 data release on 7/19 was for data ending on 7/9.  There is always this 10 day delay in the availability of the data.  The two consecutive strong-volume up-days combined with the up-tick in money supply is worth watching closely.  The trend that has been in place could turn at any moment based on the decisions of the Federal Reserve and other decisions by US banks.  Recent economic data has continued to point to a slowing of the economy, and the official Consumer Price Index does not have the Fed worried about price inflation, although they should be.  If the Fed stops draining reserves the Money Supply could resume a stronger growth rate.  If that happens, the new annualized growth rate will dictate what happens.  Anything 7% or less will be insufficient to prevent a market and economic decline.  Our best guess is a sudden and sustained growth rate of 10%+ annualized would be needed to restart the bubble-boom.  We’re not advocating for this as the bubble-boom must and will crash.  Better now than later.

All things considered our advice remains unchanged.  Accumulate and hold cash.  Avoid US stocks and all bonds.  Hold your price inflation hedges.  Only add to price inflation positions if you have done additional research.  If the market turns up you will not miss much growth.  If the market turns down, which we still see as more likely, you will protect your wealth from the crash.