For Thursday, October 4, 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 0.36% on Wednesday with volume above Tuesday and higher than the 30 day moving average volume.  If the S&P 500 declines about 12 points on Thursday (-0.9%) our automated forecast could change to an uncertain trend.

Subjective Comment:

Wednesday was another strong-volume up-day for the S&P 500.  Our pattern recognition software continues to find hints of both future market growth and future market declines.  This is common during turning points and not at all unexpected given the recent changes in the US M2 money supply growth rates.  These clues are not fully developed patterns, and we’re not sure a fully developed pattern will actually emerge from the market in the next few days or even weeks.  The best subjective insight we can offer comes from our observations of the US money supply as interpreted by Austrian Business Cycle Theory.

The Fed Funds rate remains in the 0.15% to 0.16% range.  This suggests the New York Fed continues to partially sterilize the QE3 money, at least enough to keep the Fed Funds rate where they want it.  This will not matter if US banks decide to accelerate new loan originations.  There are indications in the housing market that new home loan applications are being made, so the Fed’s support of mortgages via QE3 might indeed influence banks to lend more aggressively.  US banks could, if they choose, aggressively grow the US M2 money supply if they aggressively originate more loans.  In the summer of 2011 US banks were lending aggressively and the US M2 grew at an annualized rate of about 25%.  This level of lending would cause the US M2 growth to more than triple its current rate, in turn driving a bubble boom in the US economy and stock market.  Price inflation will also happen, and it appears serious investors are positioning to take advantage with investments in price inflation hedges.  It still makes sense for individual investors with any size portfolio to invest in price inflation hedges as long as additional research is done to identify the most appropriate opportunities for individual circumstances.  Price inflation hedges should be held for a long period of time.  Continue to avoid all bonds and be ready to begin investing in US equities.

A lot of small investors have been fleeing US equities for quite a while, and this has not stopped since the announcement of QE3.  Keep in mind the “herd” is usually wrong about the market, especially at market turning points.  QE3 will have an impact as the money supply grows in response.  It’s been almost 3 weeks since the announcement and so far the US M2 growth rate has not responded.  If it does, stocks will move much higher.

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