For Tuesday, September 25, 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 0.22% on Monday with volume below Friday and lighter than the 30 day moving average volume.  A further decline of about 23 points on Tuesday (-1.6%) could be enough to change our forecast to an uncertain trend.

Subjective Comment:

The S&P 500 decline on Monday was mild in both the index drop and light volume.  US are holding steady ever since the Fed’s QE3 announcement and we find this very interesting.  While QE3 money has likely not started entering the US economy yet, it would seem there would be market participants interested in front running a QE3 bubble boom.  The absence of continued advance in the US market indices is data suggesting most market participants are unsure what direction stocks will go from here.  The Fed Funds rate remains virtually unchanged at 0.15%.  An alternative perspective would be to note that European stocks fell on Monday while US stocks were little changed.  This could be considered bullish for US equities.  The only honest assessment for the US economy and stock market right now is to admit the picture is unclear.  If QE3 money spurs bank lending, there could be a rapid acceleration of the US M2 money supply growth rate and a subsequent bubble-boom.  If QE3 instead expands excess reserves and the money supply growth rate remains where it is now, then the US economy and markets will stall without significant movement up or down for the short run, perhaps a few months.  Until an updated US M2 money supply is determined and the flow of QE3 is assessed relative to US Banking excess reserves, any prediction right now is nothing more than a guess.  This is why our subjective recommendation remains to prepare to invest in the stock market very soon, but to continue to hold cash.  Price inflation is going to accelerate, so investing in hedges against price inflation is also a very good idea right now.  Avoid all bonds.  Bonds will eventually fall in price when defaults occur, or when price inflation accelerates.

Comments are closed.