For Wednesday, October 24, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 declined 1.4% on volume above Monday and higher than the 30 day moving average volume.  This has triggered our stop-loss algorithm again and changed our automated forecast back to an uncertain trend.  The S&P 500 would have to advance about 16 points (+1.1%) on Wednesday to change our forecast back to a growth trend.

Subjective Comment:

Tuesday was a strong-volume down-day for US markets.  There have not been a lot of these days recently, so our pattern identification software still has not identified a fully formed pattern with predictive value.  Our automated forecast remains susceptible to frequent changes given the volatility and sideways to downward motion happening on the S&P 500 index.  The market weakness is another indication that the new unlimited Quantitative Easing program is not causing the US money supply growth to accelerate sufficiently to ignite another bubble-boom.  US banks are simply not accelerating their origination rate of new loans.  While they are making new loans, and many appear to be new mortgages, the rate of new money being lent appears to be completely offset by the rate of old loans being paid off.

We hope our readers exited their US equity positions Monday and avoided Tuesday’s decline.  If not, please liquidate your index funds now.  You should only be holding price inflation hedges or specific stocks for which you have done your own research.  Sell all bonds and continue to watch developments closely.  The Eurozone debt crisis continues.  Apparently the downgrading of Spanish debt was the proximate cause for the decline in US markets on Tuesday.  The European Central Bank has not accelerating their money printing of Euros.  Instead they continue to sterilize their bond purchases with offsetting asset sales.  Eventually the ECB will run out of buyers for their assets which will end the sterilization.  It is not clear when the ECB will begin unsterilized money printing, but if they do it will create price inflationary pressure on top of the QE actions by the Fed.  It is unlikely the Fed will stop printing money anytime soon; here is a good explanation of why.

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