For Friday, October 12, 2012, We Recommend Investing for Growth

We recommend investing with leveraged index funds to take advantage of growing US stock markets.

Technical Comment:

The S&P 500 was up most of the day Thursday and closed with the smallest of positive change of 0.02%.  Volume was higher than Wednesday and above the 30 day moving average volume.  Our automated forecast remains uncertain and the S&P 500 would have to advance about 5 points on Friday (+0.3%) to change the forecast back to growth.

Subjective Comment:

While the S&P 500 index was virtually unchanged, most of the day the market was ahead of Wednesday’s close.  The strong volume combined with the upward movement of the index is a sign of potential growth.  Our pattern recognition still sees partially formed patterns that could predict decline based on Tuesday and Wednesday.  Technical data only does not yet provide a clear direction for the market.

The US M2 money supply data through October 1st was published by the Federal Reserve and shows not changes in the growth rate of the Not Seasonally Adjusted series.  The prior week (ending 9/24) had shown a dip, but this was not outside of the control chart.  The uptick for the week ending 10/1 is large week-to-week but still well within the control limits.  It appears the 9/24 decline was likely influenced by typical random noise.  US M2 NSA straight-line growth rate for the past 23 weeks is 7.5%.  The Seasonally Adjusted data did go out-of-control above the upper control limit.  This is most likely due to the adjustment methodology and nothing of significance.  The NSA data series is the more important money supply to track.  There was no update on US banking reserves this week and the Fed Funds rate remains unchanged.  Using Austrian Business Cycle Theory to interpret these data suggests continued stagnation in the US economy and stock market.  For a bubble-boom to resume the annualized growth rate needs to accelerate above 7.5%.  At this growth rate we expect US markets to remain volatile and susceptible to international market shocks and geopolitical events.  We still think the accelerated US bank lending noted last week is a good reason to expect the US M2 money supply will accelerate and a bubble-boom will resume.  This is why we are recommending investing now.  Investing in leveraged index funds is one strategy to take advantage of the forecasted market growth.  Using leveraged funds involves risk but will help grow your investments faster than the rate of price inflation and keep you ahead of capital gains taxes.  Continue to avoid all bonds and also avoid the Eurozone and Chinese markets.

In the US the elections in November and the political “fiscal cliff” coming in January are possible reasons to be concerned about market growth.  Our opinion is largely based on the change in US bank lending and excess reserves trends.  The next update in banking data is Thursday next week.  Until then we’ll likely continue to recommend investing for growth unless the daily market data develops a negative pattern.

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