For Friday, September 28, 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 almost 1% on Thursday with volume below Wednesday and below the 30 day moving average volume.  The advance was enough to reverse the stop loss trigger and return our forecast to a growth trend.  The S&P 500 would have to decline about 13 points on Friday (-0.9%) to change our forecast back to an uncertain trend.

Subjective Comment:

The large swings in the S&P 500 index caused the flip then flop of our automated forecast as the stop-loss trigger was initiated and reversed.  The strong advance in the index was on weak volume.  When strong-volume down-days occur with weak-volume up-days, it is usually an indication of market weakness.  Of course, this has been the pattern for the past several months and despite this, the S&P 500 has managed to keep trending upward while we have continued to advise caution.  We still advise caution based on the technical patterns in the daily market data.

The US M2 money supply data has been released through 9/17.  M2 has been growing at an 8% annualized growth (straight line fit) for the past 4 months after a 2 month flat line.  Using open market operations the Federal Reserve, intentionally or not, caused the M2 growth rate to halt as the Fed Funds rate was allowed to increase during the on-going operation Twist and reinvestment of maturing Mortgage Backed Securities (MBS) into additional MBS instruments.  The announcement of QE3 two weeks ago has not yet produced any evidence of an accelerated growth of the US money supply.  The delay in the publication of money supply data is part of the reason for this.  We have been watching the daily Fed Funds data for indication of a change and have seen nothing.  For most of September, before and since the QE3 announcement, the Fed Funds rate has been at either 0.15% or 0.16%.

We are left to wonder just what the Federal Reserve is doing.  Purchase of MBS instruments has been an on-going operation every week for months.  To accelerate the purchase of more MBS via QE3 would have required zero delay in setting up the program.  MBS purchases had been a weekly occurrence and the intent to accelerate had been telegraphed, so we are left to wonder if the Fed has actually started QE3 or not.  If they have, why has the Fed Funds rate remained stable?  It is possible the New York Fed’s trading desk has been instructed to initiate trades so as to keep the Fed Funds fixed at the 0.15% to 0.16% range.  It is further possible the fixing of the Fed Funds rate was an independent decision from QE3 and uncoordinated.  If true, the New York Fed could be removing money by selling bonds at nearly the same rate QE3 has accelerated purchasing MBS instruments.  This would have the effect of sterilizing QE3, and will keep the M2 growth rate near 8%.  This is purely speculation on our part.  We have no insider knowledge and are waiting for a clear picture to emerge.  The fact the picture remains unclear 2 weeks following the QE3 announcement reinforces our recommendation to be ready to invest but to continue to hold off before investing in US equities.  Continue to be ready in case the situation changes, which is still very possible.  In the meantime, continue to consider price inflation hedges and avoid all bonds.

Comments are closed.