For Monday, November 26, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 advanced 1.3% on Friday, November 23rd.  Friday’s volume was below both Wednesday’s volume and the 30 day moving average.  With the large advances in the S&P 500 index during the past week it would take a drop of about 40 points on Monday (-2.8%) to change our forecast to an uncertain trend by triggering our stop loss algorithm.

Subjective Comment:

The S&P 500 market volume on Friday was very light; the lightest of the week.  Friday was a shorted day, hence the lighter volume.  Low volume is very typical for the holiday week of Thanksgiving.  The advance in US markets with light volume means investors should be cautious about a potential market rally.  An advancing market with strong volume is more the type of daily data experienced during sustained rallies.  The advance over the past week could be sustained or wiped out when normal trading resumes after the weekend.

The Federal Reserve published updated money supply data on Friday, November 23rd.  The growth of US M2 (not seasonally adjusted) continues to gradually accelerate.  With the most recent data included the straight line growth over the past 7 months is 8.5% annualized.  The residual control chart we use to identify changes in the growth rate has not identified any change in the growth rate.  The acceleration is present but so slight that it is not detectable within the weekly variation inherent in the data.  The growth rate of 8.5% remains just enough to prevent US markets from crashing but not strong enough to cause markets to advance.  If US M2 continues to grow around 8% to 9%, we think the US economy and markets will stagnate for a while.  The Federal Reserve’s unlimited purchasing of Mortgage Backed Securities is igniting a boom in the housing markets, but the trickle to the rest of the economy will be gradual as long as US Banks remain unwilling to accelerate their rate of lending.  The new QE money appears to be accumulating as excess reserves in the banking system.  When US banks accelerate lending the US M2 money supply will grow much more rapidly.  We expect this will eventually happen, but when is unclear.  Given the political uncertainty regarding federal tax rates and the “fiscal cliff”, we think US banks will wait until early 2013 before making any significant changes in their lending policies.  US markets will likely be volatile for the remainder of 2012, but we do not expect any significant growth.

Our advice to our readers remains to stay out of all bonds, and avoid the Eurozone markets as the debt crisis there appears to be getting worse with no political solution available.  Continue to avoid US stock market index funds for the time being but be ready to invest if the US money supply growth rate accelerates.  Price inflation will continue to be a problem, so investing part of your portfolio in hedges against price inflation remains a good idea if you can hold these investments for a long time without selling.

Thank you to all of our readers!  We appreciate your patronage and the recommendations you’ve been giving to your friends and families.

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