For Thursday February 21, 2013, We Recommend Investing in US Markets


Technical Comment:

The S&P 500 declined 1.24% on Wednesday with volume higher than Tuesday and above the 30 day moving average.  Wednesday qualified as a strong-volume down-day with a large drop in the market index.  This is the second strong-volume down-day in the past 3 trading sessions.  There have still not been enough strong-volume down-days close enough to create a pattern that predicts a decline, but now there are enough that close attention needs to be paid to the daily market data.  Wednesday’s market decline was sufficient to trigger our stop loss algorithm and change our automated forecast to an uncertain trend.  If the S&P 500 advances 1 to 2 points on Thursday (+0.1%) then our forecast is likely to return to a growth trend.

Subjective Comment:

On Wednesday the Federal Open Market Committee meeting minutes were published.  It appears the market reacted to FOMC conversations about the risk associated with Quantitative Easing and the possibility of slowing the rate of money printing.  Another possible reason for downward pressure on US stocks is spillover from the ongoing debt crisis and depression in the Eurozone.  The People’s Bank of China also slowed the rate of their money printing which will hasten the crash in Chinese markets.  It is also possible the latest non-drama from US Federal Politics, the dreaded impact of “The Sequestration”, could be spooking some investors.  There is a lot out there to spook market participants.  What matters is the growth rate of the US M2 money supply, and tomorrow we will have an update to this key information.  We have noted in the past several weeks the apparent dramatic slowdown in the US M2 growth rate, and we’ve commented this could be a real issue or a data error.  We’ve been leaning towards data error because many of the other data series continue to support aggressive money supply growth.  Tomorrow we will get an update of these other data series as well.

Considering that Wednesday was a strong-volume down-day, we are further influenced to be wary of the future direction of the market.  We have decided to leave our subjective recommendation at “Invest for Growth” even though the stop loss algorithm was triggered.  However, do not add to your market investments until after tomorrow’s data becomes available.  Price inflation hedges should be held for the long term and all bonds should be avoided.  Allow your income to add to your cash balances while we wait for more data to determine what the market will do.

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