For Monday, October 1, 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 0.45% on Friday with volume above Thursday and higher than the 30 day moving average.  If the S&P 500 declines about 7 points on Monday (-0.5%) our forecast could change to an uncertain trend based on the current settings of our stop-loss trigger.

Subjective Comment:

Friday was another strong-volume down-day, the 3rd such day in the past 6 trading sessions.  This is a clear beginning of a pattern indicative of market weakness, but it is a beginning and not a fully formed predictive pattern.  US markets are at a point where continued bubble growth is not possible unless the US money supply grows faster than it has been.  15 days ago QE3 was announced as an additional $40 Billion of asset purchases by the Fed, and today there is the first indication this new money is beginning to flow from the Fed into the economy. identified the first $20 Billion in net, non-rolling purchases of MBS eligible under QE3.  We checked the Fed Funds rate data and noticed it declined to 0.14% on 9/27/12.  The drop is consistent with new money entering the system and not being sterilized with the sale of offsetting assets.  The announced rate of QE3 should accelerate US M2 growth up to about 12% to 13% annualized.  It is still not clear if this new money printing will simply swell US banking excess reserves or if banks will accelerate originations of new loans.

We think QE3 by itself, if US banks do not change their current lending rates, is enough to continue a mini-bubble in the US economy and stock market for several months.  This is a small amount unlikely to make dramatic changes.  Price inflation will continue and probably accelerate as a result.  The prior weakness in money supply growth is likely to cause US markets to remain volatile for a while, and this could cause our automated forecast to switch between growth and an uncertain trend.  Our automated process is susceptible to frequent changes when the market moves sideways with high volatility.

Should US banks accelerate their loan origination rate, required reserves will grow and excess reserves will fall.  Such loans would also create even stronger money supply growth via the fractional reserve money multiplier.  With just under $1.45 Trillion (yes, Trillion) of excess reserves, US banks could easily accelerate the M2 growth rate to an annualized 25% or greater.  If this level of growth is achieved, the US stock market will experience a much stronger boom and price inflation will be much higher.  The next update for data on excess and required reserves will be published this Thursday, October 4th.  If it were not for the 3 strong-volume down-days in the past 6 trading sessions, we would probably change our subjective investment recommendation to “Invest for Growth”.  If the Fed Funds rate remains at 0.14% or continues to decline, and if US banking reserves indicate accelerated rates of loan originations, we’re very likely going to change our investment recommendation.  If you are a very aggressive investor, you’re probably already investing in US equities.  If you’re cautious, consider watching the data through this Thursday before investing.  Everyone should be positioning their investable cash into brokerage accounts to be ready to invest soon.  We still encourage investments in price inflation hedges, and we strongly recommend against investing in any and all bonds.  The Eurozone debt crisis remains a cause for concern as does the Chinese economy and geopolitical risks across the Middle and Far East.  If something causes a shock and stocks drop, that could become a buying opportunity now that QE3 money is showing up in the system.  The investment picture in the US remains unclear, but signs are starting to point towards growth.