For Monday February 11, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 advanced 0.57% on Friday with volume below Thursday and light compared to the 30 day moving average.  For the week the S&P advanced just under 5 points.  After the strong-volume down-day on Thursday it is good to see the market advance, but the light volume on an up-day is not consistent with historic growth patterns.  There are a few signs of potential weakness in the daily market data but nothing of enough significance to trigger a change in our automated forecast.  Should the S&P 500 decline about 13 points on Monday (-0.9%), our forecast could change to an uncertain trend based on our stop loss algorithm.

Subjective Comment:

The US M2 money supply growth has averaged over 11% for the past 4 months, but over the past 4 weeks US M2 (not seasonally adjusted) has actually contracted.  Even with the contraction in the past month the 4-month average has been almost double the prior growth rate.  We discussed this at length in our prior post.  The meeting minutes from the Federal Open Market Committee and comments from some members suggest the Fed might change its monetary policy sooner than originally expected.  The money supply must be watched closely.  For now we still see more than enough newly created money and credit (from bank lending) to keep the current bubble-boom going for a while.  We still recommend holding current US market equity investments and price inflation hedges.  Our advice on bonds remains unchanged; sell all bonds and avoid owning them.  The weak volume on Friday is most likely from the snow storm which probably kept most traders home, or they perhaps left early.  Still, the weak volume following a strong-volume down-day is a possible sign of a change.  Connecting the daily market data signs of possible weakness with 4 consecutive weeks of declining US M2 makes for a puzzling and concerning mix.  As we outlined yesterday, it is completely possible the recent US M2 decline is actually bad data since all the other data points to an expanding money supply.  It will take more data in order to produce a better subjective interpretation of the current situation.

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