For Friday, September 21, 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 0.05%, which was less than a point down for the index.  Volume was lighter than Wednesday but above the 30-day moving average.   If the S&P 500 declines about 32 points on Friday (-2.2%) our forecast would likely change to an uncertain trend.

Subjective Comment:

The S&P 500 index continues to hover where it ended last week with virtually no change.  The daily market data has not provided any technical indication of the future direction of the US market.  Our automated forecast remains on growth based on the past trend.

We have analyzed the weekly money supply data from the Federal Reserve.  The US M2 money supply data is now available through 9/10/12, which is before the QE3 announcement.  The updated data shows US M2 (not seasonally adjusted) now growing at 8% annualized by a straight-line curve fit.  Based on the recent US M2 history and the current growth rate it is very difficult to predict what will happen in the very near term using Austrian Business Cycle Theory.  Assuming QE3 will increase and sustain the M2 growth rate at about 12%, we predict the US market and economy will enter a very mild bubble-boom which could last 3 to 6 months.  If US banks accelerate lending and grow the money supply faster via fractional reserve lending, the boom could be much stronger and last longer.  For this reason we continue to recommend being prepared to move your money from cash to a location where you can quickly invest in US equities.  However, don’t invest yet.  If the US M2 growth rate is only around 12%, we will wait to see if this is enough to cause a market advance.  It probably will be, but there is another possibility.  US banks could slow their originations of new loans and allow the QE3 money to grow excess reserves.  This would depress the M2 growth rate and a boom might not appear.  Our best guess is a bubble-boom will happen from QE3, but how strong and how long are unknown.  When it becomes clear US banks are not working against QE3 we will change our subjective recommendation.

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