For Thursday, November 15, 2012, We Recommend Against Investing

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Technical Comment:

The S&P 500 declined 1.4% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  An advance of about 16 points by the S&P 500 on Thursday could be enough to change our forecast to a growth trend, but this would be a reversal of our stop loss algorithm and not from a pattern predictive of growth.

Subjective Comment:

Wednesday was a second consecutive strong-volume down-day for US markets.  Our software that detects patterns sees nothing indicating potential growth.  Patterns predictive of decline are in progress but not fully formed.  It seems there is plenty of uncertainty causing market participants to sell and drive stock prices down.  For this reason we continue to advise our readers to avoid US stock market index funds right now, but to be ready to invest if circumstances change.  For example, today the Federal Reserve released the minutes of October 23-24 meeting of the Federal Open Market Committee (FOMC).  The minutes are not very telling, but there is an interesting hypothesis presented by ZeroHedge.com.

There is a chance that QE3 will double in size starting in January.  Currently QE3 is adding $40 Billion Dollars per month of unsterilized money via purchasing of Mortgage Backed Securities.  This is in addition to the $45 Billion Dollars per month associated with Operation Twist (OT).  OT involves the purchase of long term US Treasury Bonds (10+ Year maturities) and the simultaneous selling of short term US Treasuries at the same rate.  This means OT is a sterilized operation that does not add to or subtract from the money supply.  ZeroHedge.com speculates the FOMC will continue the flow of $85 Billion into the money supply in January while halting the $45 Billion Sale of short term US Treasuries.  If this happens, the removal of the sterilization will have the effect of increasing QE3 from $40 Billion per month to $85 Billion per month.

If all of this additional $45 Billion per month were to appear in the US M2 money supply, US M2 could accelerate to around 13% annualized growth from its current 8% rate.  Of course US Banks could simply allow the additional QE money to increase their excess reserves and US M2 growth could be unaffected.  January is also when the new US Congress will begin its session and the “fiscal cliff” negotiations are to be complete, if you believe US politicians will be able to reach an agreement.

Geopolitical tensions are heating up in the Middle East and the Eurozone debt crisis continues to cause serious difficulties.  Some US investors will sell their stock holdings prior to the end of the year to avoid higher capital gain taxes which seem highly likely to go up.  There is plenty to keep markets volatile in the near future.  The Fed or US Banks could cause the US money supply growth to accelerate at any moment.  This is why we advise avoiding US stocks but being ready if circumstances change.  Also avoid all bonds and consider putting part of your portfolio into price-inflation hedges.  Do not believe the “official” Consumer Price Index and the media reports of mild inflation.  Shadowstats.com publishes the CPI as it was calculated in 1980, and it is very near 10%!  Price inflation has still not caught up to the prior Quantitative Easing, so the indefinite QE3 will make price inflation worse.

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