For Wednesday, August 22, 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 0.35% on Tuesday on volume higher than Monday but below the 30-day moving average volume.  If the S&P 500 declines another point or two (-0.1%) on Wednesday our automated forecast could change to an uncertain trend based on the stop-loss rules we use.

Subjective Comment:

Tuesday was processed by our pattern recognition software as a strong-volume down-day, even though volume was below the 30-day average.  Tuesday’s volume was 3.28 Billion Shares which was above the 3 Billion mark.  This was only the second time in the past 8 trading sessions volume was above 3 Billion shares, hence the classification as a strong-volume down-day.  One such day does not create a complete pattern of predictive significance, but it is still something we note and will watch carefully to see if a predictive pattern forms.  We do want to emphasize that the S&P 500 decline on Tuesday was almost enough to change our automated forecast.  If the index had closed down 1 more point, our stop-loss algorithm would have triggered.  If the S&P 500 moves sideways with high volatility over the next few days, our automated forecast could flip back and forth between growth and an uncertain trend.

Since the beginning of June the S&P 500 has bounced around but managed to climb 10%.  This entire time our subjective opinion has been in conflict with our automated forecast based on our analysis of the US M2 money supply.  Our subjective advice has resulted in a missed opportunity to increase an investment by at least 10% or more if a leveraged index fund were used.  We have not been good at forecasting based on our interpretation of the money supply.  We remain convinced that Austrian Business Cycle Theory is sound economics and the US economy and stock markets remain in a fragile state given the 3 consecutive months of 0% M2 growth that occurred earlier this year.  The resumption of a 7% annualized growth of the US money supply is not enough to resume a bubble-boom, but it could delay the necessary decline that will eventually happen.  If M2 growth accelerates more, a bubble-boom could resume.

Comments from Eurozone officials appear to suggest the European Central Bank is moving closer to large-scale Euro printing in order to avoid a breakup of the monetary union.  The real reason for Euro money printing would be to bailout Spain, Italy, Portugal, Ireland and perhaps Greece again.  This would not go over with German voters.  The change in rhetoric regarding the need to preserve the currency is an attempt to get political support for massive money inflation.  If this happens, Eurozone markets will surge higher with US markets following from spill-over effects.  Any spill-over will be short lived unless US M2 growth gets stronger.

We remain at a fragile and uncertain state for US markets.  Tuesday was a strong-volume down-day, which is a negative sign.  US M2 growth rate has climbed back to 7% annualized.  This is not enough to keep stock growth going, but if M2 accelerates more the result would be sufficient stimulus to fuel US market growth.  The ECB might begin printing and has been talking about it to encourage market growth, but as of yet the ECB is not inflating the Euro supply.  It is absolutely impossible to subjectively interpret the situation and guess which way US markets will go from here.  This uncertainty is why we continue to advise a risk-off position, or to hold and accumulate cash and avoid US stocks.  The resumption of the US M2 growth rate is why we are again recommending the accumulation of price-inflation hedges.  Price-inflation will cause bond prices to fall.  Many municipalities are deeply in debt and likely to go bankrupt.  For these reasons continue to avoid all bonds.  We are still waiting for a clear trend in US markets to present itself before recommending a long or a short position.  We regret the missed opportunity for a 10% gain since this past June, but we are not perfect.  We stand by our advice to take a conservative stance with your portfolio by holding cash to avoid the loss of wealth, and this continues to be our recommendation.

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