For Friday, October 26, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 advanced 0.3% on Thursday with volume higher than Wednesday but below the 30 day moving average.  The S&P 500 would have to advance about 11 points (+0.8%) on Friday to reverse the stop loss trigger in order to return our automated forecast to a growth trend.

Subjective Comment:

The small advance in the S&P 500 index on Thursday was not sufficient to change our forecast as the stop loss algorithm continues to indicate an uncertain trend for US markets.  The increase in daily volume did result in Thursday being classified a strong-volume up-day, but the volume was still below the 30 day moving average.  When the stock market approaches a turning point it is common for strong-volume up and strong-volume down days to occur.  Our pattern recognition processes have still not identified anything.

The weekly US M2 data published by the Federal Reserve shows non-seasonally adjusted growth remains in the 7.5% to 8% annualized range.  This week the number was 8%, but there is a 4 week cycle that suggests next week the growth rate could drop a bit but remain in this range.  We also noticed the Federal Funds rate crept up to 0.17%.  That’s just 0.01 percentage points above its recent normal range, but it has been 5 months since it has been this high.  It probably just crept up on the New York Fed and will return to the 0.15% to 0.16% range where it has been for months.  We will let you know if it keeps creeping up as that would be interesting.  The US M2 growth rate remains insufficient to continue a bubble-boom based on the fact an accelerating growth rate is needed as described by Austrian Business Cycle Theory.  Without the acceleration the economy and stock market will stagnate and eventually decline while price inflation will continue higher.  Our advice remains to avoid all bonds and to stay out of the US market for now.  We continue to recommend investing in real assets as a hedge against price inflation.

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