For Friday February 8, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 declined 0.2% on Thursday with volume above the 30 day moving average and above Wednesday.  The decline and higher volume resulted in a strong-volume down-day, the second such day in the past two weeks.  With two such days in the past two weeks the market now must be watched closely to see if some sort of pull-back is going to occur.  Other technical market forecasters are predicting a pull-back, and the predictions alone could be enough to spook some investors.  The European Central Bank announced no change to their monetary policy, so Eurozone stocks will remain in decline and that could spill over a little to US markets.  There have not been enough strong-volume down-days to reverse the overall trend of the market.  Our automated forecast for US markets continues to be a growth trend.  A decline of about 9 points on the S&P 500 on Friday (-0.6%) could be enough to trigger our stop loss algorithm which would change our forecast to an uncertain trend.

Subjective Comment:

The Federal Reserve published weekly US money supply data and biweekly data for US banking reserves.  The data show a puzzling mix.  The Fed Funds rate is down over the month of January, and this is consistent with accelerating money supply growth.  US banking reserves are up, both excess reserves and required reserves.  US banks appear to be accelerating their rate of lending and still are unable to lend fast enough to prevent their excess reserves from increasing.  All of these points to accelerated money growth.  M0 and M1 measures of the money supply (not seasonally adjusted) also show growth.  The odd thing is the direct measure of the US M2 (NSA) money supply shows a shrinking M2 from the beginning to the end of January.  Two weeks ago it appeared this was normal week-to-week variation, but with another decline from 1/21 to 1/28 the residual control chart now shows an out-of-control condition below the lower control limit.  This means the recent contraction of the US M2 (NSA) money supply appears to be non-random.

All other signs point to an accelerating growth of the money supply and this is expected with the Fed engaging in Quantitative Easing at a rate of $85 Billion per month.  There has still been enough money created over the past 4 months to sustain the bubble-boom that has begun, but this reversal of US M2 must be watched very carefully.  The data from the Fed sometimes has anomalies large enough to create out-of-control conditions.  It is possible US M2 could resume aggressive upward growth if the recent data is actually erroneously low and this is a measurement problem.  This is why we watch M0, M1, the Fed Funds rate and the US banking reserve data in addition to M2.  When all these data series are pointing to the same conclusion we feel highly confident in our subjective recommendations.  With M2 bucking the trend of all the other data series and an out-of-control condition on the control chart, we are concerned.  Right now we think the M2 data is potentially in error.  All other signs point to aggressive money supply growth, not a slowing and not a deflationary contraction of the money supply.  It will be a week before the next M2 data is available, and two weeks until banking reserve data is again updated.  If US M2 is actually shrinking the other data will begin to show this change as well, but it will be 1 to 2 weeks before we have visibility to confirm or refute our guess that the current US M2 data is erroneous.

We recommend holding your equity and price inflation investments.  Avoid all bonds and consider allowing your cash flow to grow your cash balances while we watch to see what M2 is doing.  The data has us only mildly cautious.  We remain very bullish and think our guess about a data error will prove correct.  We will continue to comment on the data as it becomes available so you are aware of our thinking and have a full understanding of how our subjective opinion changes over time.