For Wednesday, July 25, 2012, We Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 declined 0.9% Tuesday with volume higher than Monday and above the 30-day moving average.  A decline of about 5 points (-0.3%) on Wednesday will likely be enough to change our automated forecast to an uncertain trend based on the current parameters of the stop-loss algorithm we use.

Subjective Comment:

Monday and Tuesday were both strong-volume down-days on the S&P 500.  Tuesday saw a decline for most of the day with a slight recovery during the last hour of trading.  For the past few weeks there has been a pattern of recovery during the final hour of trading.  This is interesting but not relevant to the formation of patterns with predictive value.  What is relevant is the continued pattern of weak volume on up-days and strong volume on down-days.  This is the technical feature that has dominated the daily market data for the past several months and continues to persist.  Based on this on-going pattern, we advise against investing in US stocks.

The Eurozone debt crisis continues to be the proximate cause of US market volatility.  While this will cause day-to-day fluctuations, the underlying US money supply growth rate patterns predict a US market and economic decline are coming soon.  On timing of the decline, we’re guessing within the next 1 to 3 months provided the US money supply growth trend does not change.  Another bubble-boom could begin if US M2 starts growing both very soon and at a very strong rate.  Without this the economic indicators will continue to show weakness and US companies will continue to report weak earnings.  The M2 money supply was being inflated just above a 7% annualized rate up until 4 months ago.  This drove down interest rates and encouraged companies and entrepreneurs to invest in long-term projects that appeared affordable because of the lower rates.  Now that M2 growth has slowed there will not be sufficient funds to lend to continue these projects.  There will also be a lack of demand for their products and services compared to their estimates when they began investing.  This will force liquidations, write-offs and bankruptcies.  This is the popping of the bubble.  It is unavoidable because of the prior money supply inflation.  The reckoning could be delayed if the money supply resumes a rapid inflation, but this is becoming more unlikely.  If the Fed waits until the crash happens to try and use inflation, it will not help.  The Fed’s window of opportunity to kick the can is rapidly closing.

The prior money supply inflation is turning into price inflation, as is always the case when money supply grows.  The drought in North America will put price pressure on crops at the same time price inflation is occurring.  Specialized knowledge is needed to take advantage of price inflation hedges in the short term.  Over the very long term it is likely price inflation hedges will preserve purchasing power.  In the near term we expect volatility in just about all asset prices.  Eventually price inflation will force Treasury yields to rise, resulting in a loss of value for bond holders both in nominal and real terms.  For all of these reasons we encourage our readers to avoid all bonds, avoid US stocks and hold price inflation hedges.  Continue to hold and accumulate cash to preserve your wealth through the crash we see coming.

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