For Monday, December 3, 2012, We Recommend Against Investing

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Technical Comment:

The S&P 500 was virtually unchanged at the close of the market on Friday, advancing 0.02% on volume higher than Thursday and above the 30 day moving average.  If the S&P 500 declines about 28 points on Monday (-2%) our forecast could change to an uncertain trend.

Subjective Comment:

Friday saw US markets below Thursday’s close for most of the day, and then near the end of the trading session the indices recovered and closed mostly flat.  For the day volume was strong and the S&P 500 index was up.  Our pattern detection software identified this as another strong-volume up-day, but it was not sufficient to complete the formation of a predictive pattern.  Odd behavior can occur on any given trading day, and Friday appears to have been a bit odd when the hourly profile is considered.  This is why our pattern detection software does not trigger on single days but multiple days over a short period of time.

If you did not see our post regarding the recent US money supply data, we encourage you to read it as well as this observation about the possibility of more Quantitative Easing by the Federal Reserve.  Price inflation does not always happen when massive amounts of new money and bank credit are created as demonstrated by price indices in the US during the 1920s.  Productivity gains and the desire of people to accumulate and hold cash balances can cause price indices like the Consumer Price Index to show no price inflation while the money supply itself is growing.  Other times the price inflation is delayed and occurs after the creation of new money and bank credit.  All of the QE in the past and the more yet to come will, in our opinion, eventually result in price inflation.  It will also cause a bubble-boom in the US economy and stock market.  Like every bubble, it will eventually pop.  Using Austrian Business Cycle Theory as our basis for interpretation, we believe the US economy and stock market are highly likely to begin another bubble-boom.  It appears to be starting now, but the US markets are likely to be flat and volatile as a result of political uncertainty and Eurozone debt problems throughout the month of December.  We think January will present an opportunity to invest in leveraged index funds that grow with the US stock markets.  Until then we advise holding cash in anticipation of investing in January.  Avoid all Eurozone stocks, and avoid all bonds.  Price inflation hedges will be good investments in the long run and December offers a good opportunity to accumulate such investments if you’re able to hold them for a long time.

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