For Thursday, September 20, 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 0.1% on Wednesday with volume above Tuesday and higher than the 30-day moving average volume.  The S&P 500 would have to decline about 36 points on Thursday (-2.5%) to change our automated forecast to an uncertain trend.

Subjective Comment:

Last week the S&P 500 advanced in anticipation of the QE3 announcement, and then advanced in reaction to the announcement.  This week the market is barely changing as investors wait for the QE3 money to flow from the Fed into the economy.  So far the new money has not entered the system.  Our automated forecast has been and continues to forecast market growth.  Subjectively we remain cautious.  The brief period of 0% US M2 growth a few months ago weakened the mild bubble-boom underway in the US.  Until the M2 growth rate accelerates the market remains weak and lacks the stimulus needed to inflate.  When the QE3 money comes we will see what happens.  We think a resumption of a bubble-boom is the most likely outcome, with long-term price inflation as the consequence.  For this reason, we advise investors to prepare to move money out of cash, but to not invest in US equities just yet.  Avoid all bonds and consider price inflation hedges right now.

The reason for continued caution is the magnitude of QE3 and its impact in the short term.  QE3 will grow the M2 money supply $40 Billion per month faster than the previous growth rate.  This would increase the rate of growth from about 7% annualized to 11% to 12% annualized, but only if all the QE3 money winds up in the excess reserves of US banks.  If this is the case, QE3 will delay the business cycle crash for several months, but growth will be muted.  If US banks accelerate lending they could cause a much more rapid growth rate and subsequent bubble-boom in the economy and asset prices, including the stock market.  This is what we’re waiting for before changing our subjective investment recommendation.  So far it remains unclear what will happen.  It is also possible US banks could slow their rate of lending and off-set the QE3 impact for a short while, perhaps several months.  This would lead to a crash.  Seeing the S&P 500 remain relatively unchanged the past 3 days this week is confirming for us that now is still the time for caution until it becomes clear what US banks will do.

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