For Friday February 1, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 declined 0.26% on volume above Wednesday and higher than the 30 day moving average.  Thursday’s decline is classified as a strong-volume down-day, which is not the type of day consistent with a growing market.  However, this is the first such day in the past 3 weeks.  In the past 62 years the occurrence of strong-volume down-days has been more frequent 93% of the time.  It is expected an occasional strong-volume down-day will occur from time to time during a bull market.  Our pattern recognition software still evaluates the likelihood of a serious downturn in the market as a low probability.  Thursday’s decline was almost enough to trigger our stop-loss algorithm, but not quite.  Consequently our automated forecast remains at a growth trend.  Should the S&P 500 decline again on Friday our stop-loss algorithm is likely to trigger and change our forecast to an uncertain trend.

Subjective Comment:

The overall trend of US markets is up and will continue to be so given the very strong growth rate of the US money supply.  The past couple of down-days are no reason to change your investment positions.  If many strong-volume down-days occur in a short period of time then we might get concerned, but not now.  The Federal Reserve published updated US M2 money supply statistics and our analysis shows the annualized growth rate of the non-seasonally adjusted data is 12.2%.  This is lower than the 13.5% we reported last week because the M2 data for 1/21/13 (most recent data available) declined a lot.  The decline was almost $88 Billion in one week, and nearly $157 Billon in the past 2 weeks.  This did not create an out-of-control condition on the residual control chart we use to identify changes in trends, but it was very, very close to the lower control limit.  This bears close watching for a trend change.  A mild trend change will not be enough to stop the bubble-boom that has started.  We still expect US markets to advance for 3 to 6 months based on the money supply growth over the past 4 months.  This of course could change if the money supply shrinks, but this is highly unlikely.  The FOMC announcement just yesterday did not change the QE4 rate of $85 Billion per month and the FOMC statement indicated the Fed intends to continue money printing for the foreseeable future.  US banks could curtail lending, so this bears keeping a close watch.

We advise holding your price inflation hedges and market investments.  Sell all bonds if you own them.  If you don’t own bonds, don’t buy any.  We still think it is wise to accumulate additional investments in leveraged index funds that grow with US markets.  The change in the money supply growth rate does not mean the market has topped.  Right now it only puts at risk how long the bubble-boom will last and how high it might go.  We are still comfortable saying US markets will continue to advance from here.

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