For Thursday, October 25, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 declined 0.3% on Wednesday with volume below Tuesday and below the 30 day moving average.  Our forecast remains at an uncertain trend based on the stop-loss algorithm and an S&P 500 advance of over 1% would be needed on Thursday to change our forecast back to growth.

Subjective Comment:

Wednesday’s US market decline was not on stronger volume, so we still do not have any predictive patterns identified by our software algorithms.  Pattern identification is a rare event in our processing, so it is not unusual to go for such a long time without formation of complete patterns.  The continued decline was interesting as the market turned lower after the Federal Reserve released the FOMC announcement.  The Fed left monetary policy unchanged.  As we have discussed before, the US M2 money supply is growing around an annualized rate of 7.5%.  This will cause serious price inflation in the future.  However, this growth rate is what it has been for close to 18 months.  Austrian Business Cycle Theory explains that a bubble boom can only be sustained with an accelerating growth rate.  A constant growth rate will eventually fail to keep a market and economic boom going, but it will keep price inflation going.  We continue to recommend against investing in all bonds.  We currently recommend avoiding investing in equity index funds and only suggest investments in individual stocks if you have done your own research.  The pending increase in the US capital gains tax rate will add to selling pressure for the rest of the calendar year.  Price inflation hedges remain very good investments, but be sure to research the options carefully and choose the best for your circumstances.

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