For Tuesday February 5, 2013, We Recommend Investing in US Markets


Technical Comment:

The S&P 500 declined 1.15% on Monday with volume below Friday and below the 30 day moving average.  The index decline was large but on weak volume, so it was not a strong-volume down-day.  The pattern of growth on strong volume and decline on weak volume continues, and this is a pattern typical of bull market rallies.  The market decline was just enough to trigger our stop loss algorithm and change our automated market forecast to an uncertain trend.  If the S&P 500 advances about 1 point on Tuesday (+0.1%) our forecast is likely to return to a growth trend.

Subjective Comment:

The most likely reason US markets declined on Monday was in reaction to a much larger decline in Europe.  The Eurozone markets are crashing as the debt crisis continues as circumstances there are very different from the US.  What both the Eurozone and the US have in common is the cause and effect of money printing / credit creation leading to the business cycle, all explained by Austrian Business Cycle Theory.  The US is in the beginning of an up-swing of the business cycle while the Eurozone remains in a multiyear depression.

The Euro M2 growth rate has doubled over the last 6 months from just over 2% to just over 4%, but the increase to 4%+ remains much weaker than the 8% to 10% growth rate from back in 2006 to 2008.  Ever since the 2008 crash, the Eurozone debt crisis has persisted because governments continue to bailout banks.  What little credit creation there is has been directed to the purchasing of sovereign bonds with a combination of austerity programs.  Austerity, in this regard, is cutting of government handouts while sustaining very high rates of taxation.  Governments have been kept barely afloat while funds have been directed to Eurozone banks which remain financially fragile.  The Euro money supply growth rate would have to accelerate much more in order to have a bubble-boom stimulation of the Eurozone economy.  After the last business cycle crash in 2008 the Eurozone has seen plenty of business failures, but the refusal of governments to write-off their debts and allow the banks to fail has keep the economy in a depression.  In contrast, Iceland let their banks fail and wrote down some of their debt.  As a result the Icelandic economy is recovering.

In the US the Dollar supply growth rate has also doubled recently, but the doubling has been from a rate near 7% to just over 12%.  This is a relatively strong growth rate compared to recent history.  US banks have also been bailed out and the US has not written down any of its debt, but the much stronger money supply growth rate has the US entering another bubble-boom.  It appears enough new money has been created in the US to sustain a bubble-boom for maybe 5 to 6 months, but duration must be considered a guess as conditions can change.  US markets declined 1% on Monday after a month of growth.  European markets were down much more on Monday continuing a longer term down-trend.  Spain’s IBEX was down 5.7% over the past 4 days and Italy’s MIB was down 6.7% (same time period).  France’s CAC 40 was down 3% on Monday, with the FTSE 100 down 1.6% and the DAX down 2.5%, also on Monday.  This shows how the Eurozone trends are very different from the US market.  Unemployment is much higher in Europe compared to the US.  Bank risks in Italy and Spain were the headlines on Monday.

Combining the money supply growth rate and the volume strength in the US, it still appears US markets are in a bubble-boom.  The dip on Monday was spillover from Europe and not a reason to panic.  Our stop loss algorithm changed our automatic forecast, but we’re not changing our investment recommendation.  Continue to avoid all bonds, but invest in leveraged index funds that grow with US markets.  Also consider investing in price inflation hedges.  Price inflation in the US will eventually get worse.  If the money printing continues we could eventually wind up like Argentina.

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