For Friday, August 17, 2012, We Recommend Against Investing

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

Technical Comment:

The S&P 500 increased 0.7% on Thursday with volume above Wednesday but below the 30-day moving average volume.  If the S&P 500 declines about 17 points (-1.2%) on Friday our forecast could change to an uncertain trend.

Subjective Comment:

The US stock market advanced on Thursday after several days of flat action.  Volume was up, but still very light compared to the 30-day moving average.  There are still no patterns in the daily market data and no strong-volume growth.  Our technical analysis shows no reason to invest in the US market at this time.

The weekly US Money Supply data has been published and analyzed.  The growth rate changes are becoming easier to curve-fit with the additional data.  M2 (not seasonally adjusted) grew at 7% annualized from last August through the end of February.  During March, April and May the growth rate collapsed to 0%, followed by a resumption of growth, again at 7%.  This 3-month 0% rate has caused a deceleration in the US economy which was already stalling.  Austrian Business Cycle Theory explains that a bubble-boom must have an accelerating growth rate to sustain the boom.  The constant 7% growth rate since last August was not accelerating, so the economy and stock market had been slowing as a result.  The 3 months at 0% increases the likelihood of a market decline in the near future.  The resumption of 7% growth will delay the decline, but the lack of accelerated growth above 7% means the economy and stock market will not grow from here.  Every week we will continue to track the money supply growth rate.  If it accelerates above 10% it is possible a bubble-boom could begin again, but it has to occur soon.  We think the current money supply and economic conditions we think a market decline remains very likely.

Continue to hold cash and price-inflation hedges and be willing to add to these positions.  Avoid the US stock market and all bonds.

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