For Wednesday, September 26, 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 1.05% Tuesday with volume above Monday and higher than the 30 day moving average.  If the S&P 500 declines about another 6 points on Wednesday (-0.4%) our forecast could change to an uncertain trend.

Subjective Comment:

After spending part of the day with a mild advance and then a mild decline, US markets ended the day down quite a bit compared to the past week of trading.  Our pattern recognition software classified Tuesday as a strong-volume down-day, marking 2 such days in the past 3 trading sessions.  This is the beginning of a pattern, but not a fully formed pattern.  Market weakness at this point, a week and a half after the QE3 announcement, is very interesting.  The new QE3 money has not entered the economy yet, and there have been no additional purchases of US equities in sufficient quantity to move the markets up.  Market participants appear to be very apprehensive about investing, despite QE3.  Why is anyone’s guess.  Perhaps QE3 is not seen as a big enough stimulus.  The on-going debt crisis in Europe and various geopolitical tensions could also have participants feeling cautious.  Whatever the reasons, investors are not yet buying stocks.

In the longer run price inflation will become a problem as it is the very likely consequence of all the money printing.  This is probably going to occur in the 6 to 12 month range, but we admit this is a guess.  When it does happen, interest rates on bonds will increase as investors demand a higher return to compensate for price inflation.  If the Fed changes its monetary policy to prevent price inflation by slowing or reversing the growth of the money supply (unlikely), then interest rates will rise.  Either way, interest rates will eventually go up and bond prices will fall as a result.  This is why we advise against bond investments.  Additional details about the Fed’s challenges in the current situation are available at EconomicPolicyJourna.com.  All bonds should be avoided, including municipal bonds.

Continue to be ready to invest in the near future.  When QE3 money begins entering the economy the money supply growth could accelerate quickly and US banks might start lending.  If this happens, investing part of your portfolio in leveraged index funds will become a very viable opportunity.  For now, continue to hold cash outside of US equities while waiting to see what develops.  With the price inflation we expect in the near future, now is a good time to invest in price inflation hedges.

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