For Friday December 28, 2012, We Recommend Investing in US Markets


Technical Comment:

The S&P 500 closed down 0.12% on Thursday but had been down by more than a full percent before recovering to have a small decline for the day.  Volume was slightly above Wednesday but remained below the 30 day moving average volume.  The slight uptick in volume over Wednesday was enough for our pattern recognition software to classify Thursday as a strong-volume down-day.  There are still no fully developed patterns of predictive value.  The S&P 500 would have to advance about 8 points on Friday (+0.6%) for our automated forecast to return to a growth trend.  Our current “uncertain” forecast is a result of our stop loss algorithm only, and this algorithm is subject to errors when the market becomes more volatile.

Subjective Comment:

We have changed our subjective investment recommendation to “Invest for Growth” and explain why in the following post which is a bit longer than typical.  Despite our automated forecast being presently “uncertain” we are confident US markets are going to boom in 2013.

The volatile US market on Thursday appears to have been driven primarily by the political “fiscal cliff” news flow from Washington D.C.  The Market Overview from Yahoo! Finance published at 4:15 pm read as follows:

The S&P 500 ended the day with minor losses following a volatile session. Equities began the day on a positive note, but comments from Senate Majority Leader Harry Reid caused a quick change in sentiment. Speaking from the Senate floor, Senator Reid said that all signs suggest the country will go over the fiscal cliff… The comments caused the major averages to fall to their respective lows. However, an afternoon report out of Washington indicated the House of Representatives will reconvene on Sunday, December 30 at 18:30 ET in hopes of approving a budget. In response, the major averages raced off their lows, ending the day little changed after seeing losses of more than 1.0%.

This is exactly what we’ve been discussing for the past month regarding US market volatility at the end of the year.  The timing of the market drop and end-of-day rally was closely tied to the news events mentioned.  The increase in tax rates coming from the US Federal Government will put a damper on economic growth at the beginning of next year.  The “fiscal cliff” is nothing but political hype.  What will drive the bubble-boom growth in the US economy and stock markets is the acceleration of the US M2 money supply growth rate.  No matter what “compromise” comes from Washington D.C., markets will boom as the money supply keeps growing.

We have analyzed the weekly US M2 money supply data and biweekly US banking reserves data published by the Federal Reserve.  The current trends over the past 15 weeks continue to follow the current patterns.  Required Reserves are growing at the same rate, which means US banks continue to originate new loans in response to the Fed’s money printing operations (QE3).  Next week we will start to get data that will measure the money supply after the QE4 announcement.  US M2 (not seasonally adjusted) continues its accelerated growth.  The growth rate is somewhere around 11.5%, possibly higher.  There is a 4-week cycle in the NSA numbers, and the most current data published through 12/17/12 is on the peak of this 4-week cycle.  Should this cycle of variation about the linear curve fit continue, we expect to see US M2 around 11.5% again next week.  The actual curve fit for the past 15 weeks has US M2 growing at 12.2%.  What will be very interesting next week is if this 4-week cycle persists or not.  The data next week will be through 12/24/12 and should be influenced by the QE4 announcement.  While QE4 money will not start coming into the system until January, US banks have massive stores of excess reserves and could accelerate lending further based on the QE4 announcement.  All this matters is to how fast the bubble boom will grow.  It no longer seems to be a question of “if”, but of “how much” and “when” will the US stock market bubble begin?  How much is anyone’s guess.  We think US markets will begin a strong rally as soon as the political uncertainty settles down.

Austrian Business Cycle Theory (ABCT) explains why bubble booms occur, and that all such booms must be followed by a bust or hyperinflation.  ABCT also explains that the low interest rates (from the money printing) cause certain sectors of the economy to boom before others, such as housing.  Today there is more data showing again that the US housing market is indeed booming.  November 2012 new home sales were up 15.3% versus prior year.  The accelerated money printing (in the form of bank credit from the Fed) is having the ABCT predicted effect.  The bubble boom in the US economy and stock markets is coming in early 2013.

We are changing our subjective investment recommendation.  Continue to hold your price inflation hedges for the long term.  All of the money printing will eventually lead to serious price inflation.  The price inflation will cause bond prices to fall as investors demand a higher return to compensate for price inflation.  This is why we have continued to advise against owning any and all bonds.  If you have any bonds, sell them now.  Determine how much of your portfolio you can invest in US markets and begin accumulating ETF (exchange traded funds) that grow with US markets.  There are unleveraged index funds (ETFs) and leveraged index funds you can use to invest.  We recommend leveraged index funds for aggressive growth.  This does add risk, so some investors might want to hold a mix of leveraged and unleveraged ETFs.  The leveraged ETFs are designed to move at 2x or 3x the daily change in the S&P 500.  This means on large changes the ETFs do really well.  However, if the market moves up gradually, only a little each day, the leveraged ETFs do not do as well at achieving their targeted leverage amount.  You should be aware of this.  They are called “wasting assets” in the financial community and are considered high risk.  The upside is you will not receive a margin call from your broker if the market moves down.  If you actually use margin you are exposed to much more risk, where the ETF purchase only places at risk the principal you invest.  We encourage you to do more research to be sure you understand these products.  We feel some leverage is important or you will not keep the gains after capital gain taxes and price inflation both erode your purchasing power.  You have to decide what instruments and what risk mix is best for your situation.  However, the time has come.  Our subjective forecast is to “Invest for Growth”.  Our automated forecast might bounce about with the volatility that is still likely in the market, and we do expect some down-days along the way.  US markets will grow from here.

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