For Friday December 21, 2012, We Recommend Against Investing

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Technical Comment:

The S&P 500 advanced 0.55% on Thursday with volume below Wednesday but above the 30 day moving average.  This is technically not a strong-volume up-day because volume was below Wednesday.  However, the advance on Thursday did conform to the beginning of a multiday pattern that, if it fully develops, would be predictive of market growth.  The multitude of strong-volume up-days last week and this week point to market strength.  If the S&P 500 declines about 20 points on Friday (-1.4%), our automated forecast would likely change to an uncertain trend based on the settings of our stop loss algorithm.

Subjective Comment:

It’s interesting to see the US markets advance on a day where the politicians in Washington D.C. appear willing to let the dreaded “fiscal cliff” occur without compromise.  This suggests the accelerating growth of the US money supply is overwhelming any remaining uncertainty surrounding the changes in national tax and spending policies.

The Federal Reserve published updated US M2 money supply data and the pattern that has been present in the non-seasonally adjusted numbers for over the last half year remains evident.  There is a 4-week cycle that has masked the underlying accelerating growth, but the growth has become strong enough to be obvious.   With the data update this week the M2 growth (NSA) has accelerated to 11.2% (annualized).  This represents data through 12/10 which is still before the announcement of QE4 doubling the rate of money printing come January.  Last week the US M2 growth rate was around 10.5%.  The fluctuation week to week is caused by the 4-week cycle and other random events, so it’s likely the growth rate has been around 11% for the past 3 months and is only now becoming measurable via liner regression.

The accelerating growth of the money supply is significant because the growth rate is now higher than it has been in the past 18 months, and much longer than that excluding 2 months during the summer of 2011.  Austrian Business Cycle Theory (ABCT) explains how this will cause a bubble-boom in the economy and asset prices, including the stock market.  It also frequently leads to price inflation.  This has happened since the announcement of QE3 3 months ago, and with QE4 doubling the money printing rate in January, we expect US M2 to accelerate further.  ABCT also explains that when a bubble-boom starts, the sectors of the economy that boom first are those that are capital intensive.  In other words, any parts of the economy that rely more upon financing and long cycle times are apt to boom first.  A prime example is the housing market.  US home prices have now risen for 6 straight months.  The money supply data shows accelerating growth and economic data shows that ABCT is correct in describing how booms and busts occur.  The US is entering a boom phase which will lead to a growing stock market and, we think, serious price inflation.

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