For Monday, September 10, 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 0.4% on Friday with volume below Thursday but above the 30-day moving average.  The S&P 500 index would have to decline about 34 points (-2.3%) on Monday to change our automated forecast to an uncertain trend.

Subjective Comment:

This past Thursday still appears to be a technical breakout for the S&P 500, but it could also turn into a “double top” pattern which can precede a decline.  The advance on Friday with relatively strong volume looks like a positive sign for continued growth.  These patterns are manual observations and not from our automated pattern recognition software.  Our automated process has not identified any patterns of significance.

We still have difficulty reconciling the potential technical patterns with the US M2 money supply.  We think the Thursday and Friday advances are a reaction to the MOT program announced by the European Central Bank.  Additional commentary on the ECB program has been published with the following major points being raised:

  • The ECB said they would provide “unlimited” support
  • The ECB said the program would be fully “sterilized”
  • At some point the ECB would run out of assets to sell in order to provide full sterilization, so the “unlimited” support would actually be limited if sterilization is to be upheld, or sterilization will have to end if the “unlimited” pledge is to be honored
  • The relaxed collateral requirements would be a way for the ECB to provide unsterilized liquidity and still honor the terms of the MOT program as announced
  • What central bankers say and what they do are often not the same, so the Euro money supply has to be watched to see if the ECB is actually sterilizing or not

If the ECB actually inflates the money supply, then the Eurozone stock markets and economies will go into another bubble-boom.  The faster the money supply is inflated, the stronger the bubble-boom and resulting price inflation across the Eurozone.  The spillover impact on US markets would likewise provide some lift.  Any spillover from Europe to the US will be limited by the US M2 money supply which is still not growing fast enough to sustain continued bubble growth for the US economy and stock markets.

Be cautious and prepared to move out of cash quickly if conditions change.  For now, continue to hold and accumulate cash as a wealth preservation strategy.

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