For Friday January 11, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 advanced 0.76% Thursday on volume higher than Wednesday and above the 30 day moving average, resulting in a second consecutive strong-volume up-day.  The daily market data continues to demonstrate patterns consistent with a growth, even though a fully formed predictive pattern has not developed.  Should the S&P 500 decline about 12 points on Friday (-0.8%) our automated forecast could change to an uncertain trend.

Subjective Comment:

The Federal Reserve has published the weekly US money supply data through 12/31/12 and the biweekly data of US banking reserves through 1/9/13.  US banks are continuing to lend aggressively resulting in growing required reserves.  US banking excess reserves have held steady for the past 6 weeks, so it appears the banks are using all of the new money being created by the Fed’s Quantitative Easing to originate new loans at a faster rate.  With QE4 doubling the rate of QE3 starting in January it is highly likely US banks will use the accelerated money printing to further accelerate their rate of lending.

The US M2 (not seasonally adjusted) growth rate over the past 17 weeks has been 14.1% annualized based on a straight line curve fit.  The control chart we use to track the residuals of the growth rate does not show any out-of-control condition.  As we mentioned last week, the 4-week cycle has shown a disruption that suggests the growth rate has changed.  Based on the data available and the QE4 announcement, we conclude US bank lending has further accelerated US M2 growth.  The M2 growth rate has already accelerated enough and for long enough to sustain a bubble boom in the US economy and stock market for the foreseeable future, and now it appears the growth rate is accelerating further.

The Federal Reserve is printing money rapidly.  We recommend investing in leveraged index funds that grow with US markets.  Hold on to any price inflation hedges you own as price inflation will become even more serious as a result of this money printing.  Bond yields will climb as investors demand a higher return to compensate for inflation, and this is why bond prices are going to fall.  If you own any bonds, sell them.  If you don’t own bonds, continue to avoid them.  The use of leverage adds risk to your investments, but rest assured the market is going to go up from here.  Leverage will increase your gains, and this is highly encouraged to help compensate for the eroding purchasing power from the coming price inflation.  We don’t know how long the bubble boom will last, but by tracking the daily market data and US money supply statistics we will be able to identify when to expect the boom might end.

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