For Monday, September 17, 2012, We Recommend Against Investing

Market conditions are changing.  Please read our entire post to fully understand our current recommendation and the potential for changes in the near future.

Technical Comment:

The S&P 500 advanced 0.4% on volume higher than Thursday and above the 30 day moving average volume.  The S&P 500 would have to decline about 50 points on Monday (-3.4%) to trigger our stop-loss algorithm and change our forecast to an uncertain trend.

Subjective Comment:

Friday was another strong volume up day for the S&P 500, the 4th in a row.  Strong volume on Friday is not entirely unusual, although it is usually the lightest volume day of the week.  This past Friday was the strongest volume day in the past several months.  Our pattern detection algorithm has not identified a predictive pattern yet, although conditions are improving for such a pattern to form.

With unlimited quantitative easing now the monetary policy of the Federal Reserve, we are closely watching the Fed funds rate, US M2 money supply and US Banking reserves, both required reserve and excess reserves.  This data will indicate if the money multiplier “transmission mechanism” causes rapid growth of the money supply or not.  Austrian Business Cycle Theory explains how a rapidly inflating money supply causes a bubble-boom in an economy and asset prices, including stock markets.  Based on current conditions our best estimation is a double digit US M2 growth rate would cause a resumption of a bubble-boom in the near term.  This means the crash from the prior money printing will be pushed into the future and will be worse when it occurs.  We recommend investing in price inflation hedges and preparing to move from cash into leveraged index funds in the near future.  If the US M2 growth rate remains at the current annualized 7% or falls, which could happen if QE3 money ends up in excess reserves, then QE3 will not cause a bubble-boom to resume and the stock market could still stagnate.  US Banks have accumulated just under $1.5 Trillion dollars of excess reserves from prior rounds of QE, so this is a possibility.  No one knows if QE3 will ignite another bubble or not, so close monitoring of the data is necessary.  So far it remains much too early to tell, so we continue to advise against investing for now.  Only the very aggressive investors should consider investing in leverage index funds right now, and if so they should not go all in.

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