For Monday, October 29, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 declined 0.1% on Friday with volume below Thursday and lighter than the 30 day moving average volume.  Our forecast for the S&P 500 remains uncertain with the market about 12 points below our stop loss setting.  The market would have to advance about 0.8% on Monday to change our forecast back to a growth trend.

Subjective Comment:

If the market on Monday does advance enough to reverse our automatic forecast, we are likely to leave our subjective recommendation at risk off.  There are no developing patterns identified by our automated algorithms to suggest the S&P 500 will advance.  In addition we are concerned about the state of the US economy and stock market after more than a year of a manipulated bubble-boom created by the inflating money supply.  Austrian Business Cycle Theory explains that an accelerating growth rate of the money supply will create a manipulated boom in the economy and stock market.  A constant growth rate of the money supply will eventually fail to sustain the bubble, but will contribute to price inflation.  US M2 (not seasonally adjusted) has been growing around 7.5% to 8% annualized without acceleration.  We had though the new Quantitative Easing from the Federal Reserve would convince US banks to accelerate lending.  We were wrong.  The new QE and US bank lending remains insufficient to accelerate the US M2 growth rate.  As long as this is the case, investors should avoid investing in US markets.  We also advise against investing in bonds.  Positioning part of your portfolio to hedge against price inflation is a good idea as price inflation is likely to get much worse over the next 6 to 9 months.

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