For Friday, August 24, 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 0.8% Thursday with volume below Wednesday and lighter than the 30-day moving average.  The decline was sufficient to trigger the stop-loss algorithm and our automated forecast has changed to an uncertain trend.  It is likely our forecast could change if the market bounces up and down.  If the S&P 500 advances about 9 points (+0.6%) on Friday, our forecast could return to a growth trend.

Subjective Comment:

The US market decline on Thursday was on light-volume.  The change in our forecast is a stop-loss safety feature of our automated analysis.  There are still no patterns in the daily market data.  Patterns occur when multiple strong-volume days occur in quick succession.  This is not the current pattern.

The weekly US M2 money supply has been published and we noticed the following from our analysis:

  • Over the past 16 weeks the US M2 (not seasonally adjusted) money supply has been growing at an annualized rate of 7.1%
  • There is no indication the current 7.1% growth rate is changing
  • US Banking Excess Reserves remain unchanged
  • US Banking Required Reserves show interesting data, the more reliable NSA data remains flat, but the Seasonally Adjusted data has been showing growth over the past 4 weeks at a radically faster pace – this appears to be from the seasonal adjustment factor and nothing else
  • The Fed Funds rate is holding steady at 0.13%

The decision makers at the Federal Reserve like to look at the Seasonally Adjusted data, which is a bad decision.  If they think the SA Required Reserves are accelerating instead of realizing the change is just the fudge factors, they are likely to think banks are accelerating their lending.  The NSA data shows no change in US bank lending rates.  Without accelerated US bank lending, the fractional reserve money multiplier will not accelerate the money supply growth rate.  The only other ways to accelerate the money supply growth rate will be if the Fed lowers the Fed Funds rate or initiates a new Quantitative Easing program.  We have no idea what the Fed will do, but our best guess is they will continue to hold everything as-is, which means continued US M2 (nsa) growth at 7.1%.

The brief 0% growth of US money supply has put the US economy and US stock market in a weaker position and more likely to decline in the near future.  To extend a bubble-boom the growth rate needs to grow much stronger than the current 7%.  As long as growth is at 7% or less, we expect the US market rally to stall and eventually decline.  Timing of the decline is impossible to predict using Austrian Business Cycle Theory, but decline it will.

The change in our automated forecast should be considered another reason to remain in cash to avoid a market decline.  Research price-inflation hedges and avoid all bonds.  Our advice is to position your portfolio for wealth preservation.

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