For Wednesday December 12, 2012, We Recommend Against Investing

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Technical Comment:

The S&P 500 advanced 0.65% on volume higher than Monday and above the 30 day moving average.  If the S&P were to decline about 16 points on Wednesday (-1.2%) our forecast could change to an uncertain trend.

Subjective Comment:

Tuesday was a strong-volume up-day.  If the Federal Reserve doubles their rate of money printing and US banks continue or accelerate lending, we expect the growing money supply to fuel a bubble-boom in the US economy and stock market.  The Fed’ announcement comes on Wednesday afternoon.  In the last 6 trading sessions the day before the Fed announcements the stock market rallied 5 times.  Tuesday’s advance was likely from traders attempting to get in front of tomorrow’s Fed announcement.  The “fiscal cliff” negotiations continue to have some influence on the stock market, but the accelerating US M2 money supply will eventually overwhelm any short-term blips.  We are not yet changing our subjective recommendation until we see if the speculation regarding the Fed’s money printing comes true.  If multiple strong-volume up-days continue, our pattern recognition software will likely identify a growth pattern as well, but that has not happened yet.  Continue to be ready to invest soon, and continue to avoid all bonds as well as Eurozone and Chinese markets.

Another indication a manipulated bubble-boom fueled by money printing is starting is the upturn in US construction.  Austrian Business Cycle Theory explains how accelerated money printing creates a boom.  All booms eventually bust, but while the boom is in progress the abnormally low interest rates encourage overinvestment in capital intensive industries, such as construction.  The economic indicators of an upturn in construction are further validation of what is happening.  Unlike previous years where Quantitative Easing grew excess reserves in US banks, this time US banks are accelerating their lending as is evident in the growing required reserves.  The major down-side to all the money printing will be price inflation.

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