For Friday January 4, 2013, We Recommend Investing in US Markets

Technical Comment:

The S&P 500 declined 0.2% on volume below Wednesday but above the 30 day moving average.  Since volume was below Wednesday our pattern detection software did not classify Thursday as a strong-volume day.  The S&P 500 would have to decline about 43 points on Friday (-2.9%) to change our automated market forecast to an uncertain trend.  After the strong advance in the S&P 500 index on Wednesday, a minor decline of 0.2% on Thursday is actually very bullish.  This shows the market is able to hold its gains after a large advance.  Market advances on strong volume and minor pull-backs on light volume are consistent with historical market growth.  Our process has not identified the full formation of any predictive patterns as of this point and there are no negative patterns developing.  From our technical analysis alone, now appears to be a good time to invest for growth.

Subjective Comment:

The Federal Reserve has published the weekly US Money Supply statistics.  US M2 (not seasonally adjusted) continues its accelerated growth, and there are signs the growth rate has now accelerated even more to 13% annualized based on a straight line fit over the past 16 weeks (almost 4 months).  Going all the way back to April of 2012 there has been a clear 4 week cycle where US M2 has fluctuated up and down about the straight line growth.  The pattern clearly showed a dip every 4th week with the exception of 2 consecutive weeks of a dip at the end of each calendar quarter.  Based on this pattern, the US M2 residual for 12/24/2012 should have dropped below the control chart centerline.  It did not.  This could be random, but it does not fit the prevailing pattern and suggests a change happened.  The 12/24/2012 data point is also the first US M2 data following the announcement of QE4.  If we conclude this is a non-random change, then QE4 appears to have motivated US banks to further accelerate their origination rate of new loans.  US banking reserve data will not be available until next week, so we’re speculating on the cause, but this is the most likely explanation.

Over the past 3+ months the growth rate of the US money supply has doubled!  This is causing the US economy and stock markets to enter a manipulated bubble-boom.  Austrian Business Cycle Theory (ABCT) clearly explains how the boom happens when the money supply expands at an accelerated growth rate.  ABCT also explains how capital intensive industries (automobiles, housing, etc.) will boom first as a result of the artificially low interest rates, and this is what is happening.  Employment will also improve in these sectors first, and Thursday’s ADB Jobs report shows this is exactly what is happening (hat tip EconomicPolicyJournal.com).  In addition, November’s leading economic indices suggest expansion in 49 US states during the first half of 2013.

The money creation (QE4 and Bank Lending) will drive the bubble-boom for quite some time as a large amount of money has already been created.  This will also lead to price inflation and falling bond prices.  We encourage our readers to invest in leveraged index funds that grow with US markets, and to avoid all bonds.  Price inflation hedges will likely not advance in price much in the near term, but they should not pull back much either.  When price inflation heats up any price inflation hedging will help protect your purchasing power.  Leveraged investing is recommended to help grow your portfolio faster than the rate of price inflation.

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