For Thursday January 3, 2013, We Recommend Investing in US Markets

Technical Comment:

The S&P 500 advanced 2.5% on volume above Monday and higher than the 30 day moving average volume.  Wednesday’s market volume and index advance is classified by our pattern detection software as a strong-volume up-day.  A fully formed pattern with predictive value has not yet formed but is under development.  The S&P 500 would have to decline about 46 points on Thursday (-3.1%) for our stop loss algorithm to change our forecast back to an uncertain trend.  This would be our automated forecast only and not necessarily our subjective investment recommendation.

Subjective Comment:

The political “solution” to the dreaded “fiscal cliff” likely had a lot to do with the strong advance in US markets on Wednesday, but it was not the only reason for the climb.  The political drama has eased the concern of the less sophisticated investors, so there was less selling as a result.  This removed the drag that has been anchoring the market for the past few weeks.  The fuel for the advance is all the new money that has been created via Quantitative Easing and accelerated lending by US banks.  There will be more political pseudo-drama in the US with the debt ceiling having been reached.  This will drive more negotiations in the near future, and the so-called fiscal cliff solution only provides a “fix” for two months.  These headline grabbing issues will spook some investors and cause some continued volatility along with normal down-days that occur with every rally.  The US M2 money supply growth rate has accelerated for long enough that a boom should be sustained for quite some time to come.  With Quantitative Easing doubling in January there is every reason to believe the bubble-boom that has begun will be strong and last a long time.  We will continue to monitor the money supply for any indications of change.

We recommend investing part of your portfolio in leveraged index funds that grow with the US stock market.  Liquidate any bond holdings you have and avoid them for a long time.  As the stock market booms, money will flow out of bonds and into equities.  This will put downward pressure on bonds.  The accelerated money printing will drive prices higher, and that too will cause bond prices to fall as bond investors demand higher yields to offset price inflation.  If you own price inflation hedges, consider holding those for a long time as price inflation will get worse.  We must stress again our recommendation to use leverage in your stock market investments.  It does add risk, but by following our forecast the risk is mitigated.  It is also necessary to grow your investments faster than price inflation in order to have a real gain.  You also need to grow fast enough to overcome the impact of capital gain taxes which also impact your real gain.

Comments are closed.