For Thursday, August 16, 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 0.11% with volume below Tuesday and below the 30-day moving average volume.  If the S&P 500 declines about 12 points on Thursday (-0.9%) our forecast is likely to change to an uncertain trend.

Subjective Comment:

S&P 500 volume continues to be very light.  Wednesday marked 4 consecutive trading sessions below 3 Billion shares.  We can only guess why so many market participants are choosing to avoid investing in US markets for the past 4 days.  The fact that volume has declined remains interesting and sets up the possibility of strong-volume down-days in the near future.  Tuesday’s very minor decline was technically on stronger volume than Monday.  Since volume is far below the 30-day moving average we did not see this as significant enough to mention yesterday.  Our automated system evaluates patterns in the daily data, and the light volume we’re seeing does create the possibility of pattern formation.  So far, no patterns have developed.

Economic data continues to demonstrate a weak US economy.  This is consistent with the slow-down in the US Money Supply growth rate during the first half of 2012.  The bubble-boom is ending as shown by various indicators such as the Empire State Manufacturing Survey which showed a sub-zero result of negative 5.85, the first negative value since October 2011.  The National Association of Home Builders released their data on housing starts, which increased from an index value of 35 to 37, the highest value since February 2007.  This is NOT good news.  The very low interest rates are encouraging the building of new homes, even though there is a huge inventory of unsold homes on the market.  You have probably noticed construction in your own neighborhoods.  This is a type of mal-investment encouraged by the artificially low interest rates.  While the media might spin housing starts to be a positive economic sign, housing completions is the more telling number.  Zerohedge.com points out completions have been at their lowest point in the past 40 years since 2007.  It is an incredible waste of resources to start building so many houses and not complete them.  This is more evidence that the bubble-boom in the US economy is ending and is unsustainable.  There is a remote chance the Federal Reserve could accelerate the growth rate of money printing and start another bubble-boom, but this would take a steep and sustained increase in the rate of creating new money.  This could be accomplished by aggressive bank lending or by Quantitative Easing.  QE3 is unlikely thanks to the political pressure from the US election campaigns as well as by comments from Fed Governor Richard Fisher.  Anything is possible.  If acceleration in the money supply growth occurs the weekly US M2 data will show it.

Our investment advice remains to avoid the US stock market as a crash remains very likely although the timing of the crash is unknown.  Our technical analysis has not yet identified market patterns that precede a crash, but Austrian Business Cycle Theory predicts a crash will happen as long as the US money supply remains growing at the current rates.  We also advise against investing in all bonds.  Here is additional information on municipal bonds from Zerohedge.com and EconomicPolicyJournal.com.  All bonds will drop in value when interest rates start climbing, and this is likely to happen one way or another in the not-too-distant future.  If money printing stops, the price support for bonds falls away and bond prices fall.  If money printing accelerates then price inflation will follow.  Price inflation will cause investors to demand a higher rate of return on bonds, which will cause bond prices to fall.  This is why we continue to advise against owning all bonds.  Holding cash is a short term strategy to avoid loss of value in both US stocks and bond markets.  Since price inflation will continue to be a problem, we encourage you to research price inflation hedges as possible investments.  When the US markets crash the Fed will likely start QE3 quickly; this will drive price inflation investments up.  Now is a good opportunity to research and accumulate commodities that best fit your circumstances.

One Response to For Thursday, August 16, 2012, We Recommend Against Investing

  1. MJ says:

    The market keeps ticking up on low-volume and inside the previous days D-shaped bi-modal pattern. From a technical analysis point of you, this is a high-probability formula for a breakout. Why does your read on the market – inspite of the consistent uptick (despite low volume), spell doom?