For Friday, October 19, 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 declined 0.24% on Thursday with volume higher than Wednesday and above the 30 day moving average volume.  The S&P 500 would have to decline about 23 points on Friday (-1.6%) to change our automated forecast to an uncertain trend.

Subjective Comment:

After several strong-volume up-days for the S&P 500, Thursday was a strong-volume down-day.  While the index decline was only a quarter percent, the high volume is not what investors want to see when growth is expected.  One such day is not uncommon in a strong market, but we are at a turning point and it is not clear from our pattern recognition software if this turning point will see the market continue up or begin to decline.

The weekly US M2 money supply data and the biweekly US banking reserves data was published today by the Federal Reserve.  The US money supply continues to grow at a 7.7% annualized rate and has been for the past 24 weeks.  We thought this growth rate might start to accelerate but so far it remains in the upper 7% range.  More concerning is the data on US banking reserves.  The excess reserves directly indicate the amount of new loan originations by the banks, and they fell back to where they were a month ago.  This was a $14 Billion Dollar swing up two weeks ago, and back down as of today.  Excess reserves had declined, and now they are back where they were a month ago as well.  These data series tend to cycle up and down every two weeks, so it will be very important to see what this data does two weeks from now.  Based on this change we are now more concerned about the possibility of another bubble-boom starting in the US economy and stock market.  Austrian Business Cycle Theory explains that an accelerating money supply growth rate is needed to start and sustain a bubble.  The US M2 growth rate has been mostly growing at about 7.5% for close to 14 months, so the current growth will not keep the markets growing.  We still think it is likely the indefinite Quantitative Easing by the Fed will accelerate the growth rate, but so far it has not happened. Accelerated lending by the banks will also speed up the growth rate, but it is no less clear if this is happening or not.

For the next two weeks we recommend against accumulating more positions in the US stock market.  Continue to invest in price inflation hedges and avoid all bonds.  We will continue to evaluate the daily market data for signs of changes in the market trends and comment on this every day the market is open.  For the past two weeks we have been saying we’re at the beginning of another upswing in a bubble-boom.  We are less sure as a result of the banking reserve data.  Integrating this information with the strong-volume down-day that happened Thursday, it is now very important to carefully watch the market data for investment guidance.

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