For Tuesday, September 18, 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 declined 0.3% on Monday with volume below Friday but above the 30-day moving average volume.  The S&P 500 would have to decline about 42 points on Monday (-2.9%) to trigger our stop-loss algorithm and change our forecast back to an uncertain trend.

Subjective Comment:

The decline on Monday produced interesting technical output from our automated pattern recognition process.  After the QE3 announcement from the Fed last week we saw US markets advance.  With the decline on Monday our pattern recognition software has nullified what had been the beginning of a growth predictive pattern.  The lack of any pattern formation or even the continued accumulation of strong-volume up-days shows the market is taking time to react to QE3 and other information.  We are also waiting for additional money supply data before changing our investment recommendation.  We think it is likely QE3 will cause a bubble-boom, but how strong it might be is unclear.  The additional of $40 Billion per month from QE3 will increase the US M2 money supply growth rate to about 11% to 12% annualized.  If this money grows excess reserves in US banks, then its simulative impact will be minor, probably only delaying the next crash by a few to several months.  If US banks increase the originations of new loans, then the money multiplier will take effect and the US M2 growth rate could be much stronger, perhaps as much as 25% annualized as was achieved in the summer of 2011.  Be prepared to change your investments from a wealth preservation strategy to a growth strategy, but do not invest just yet.  If you wish to reduce your cash holdings now, consider price inflation hedges, but do your own additional research to identify the best option for your situation.

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