For Monday, September 24, 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 0.01% on Friday with volume above Thursday and higher than the 30-day moving average volume.  If the S&P 500 were to decline about 29 points on Monday (-2%) our forecast could change to an uncertain trend.

Subjective Comment:

This past week the S&P 500 index made very little movement up or down, but the tiny fractional decline on Friday did occur on much larger daily volume compared to the entire week.  This was identified as a strong-volume down-day by our automated pattern detection process, but it is only one such day and not overly significant by itself.  The interesting thing continues to be the lack of any serious upward movement following last week’s announcement of QE3 by the Federal Reserve.

QE3 money printing does not appear to have yet entered the system.  The Fed Funds rate remains at 0.16% and steady, suggesting no serious change in the availability of funds for US banks to lend.  Non-Seasonally Adjusted required reserves remain flat, also suggesting lending has not yet accelerated by US banks leading up to the QE3 announcement.  The pause in the market’s up-trend combined with this data suggests most participants are waiting to see what will happen.  It is still impossible to tell exactly what is developing.  Right now the most interesting data are the steady Fed Funds rate, the flat S&P 500 and the accelerating US M2 growth rate up to 8% annualized.  Money supply growth has been gradually accelerating leading up to the QE3 announcement, but the Fed Funds and S&P 500 have been flat since the announcement.  US Banks have $1.45 Trillion Dollars of excess reserves and could accelerate lending right now, yet there is no indication for a week following QE3’s announcement that US banks are changing their behavior.  With QE3 having no scheduled end date, it is very interesting US banks are still not lending faster.  This could be just a pause before an acceleration, or it could be an indication US banks are not about to do anything with QE3 money except let excess reserves grow.  This uncertainty is why we continue to hold back from changing our investment recommendation.  Our advice is to be ready to invest in US stocks soon as it is likely QE3 could cause a bubble-boom, but to wait until data confirms the money supply growth is accelerating strongly.  Price inflation hedges continue to be a good investment now, but be sure to do your research carefully before choosing what is right for your situation.  Continue to avoid all bonds.

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