For Monday February 25, 2013, We Recommend Against Investing


Technical Comment:

The S&P 500 advanced 0.9% on Friday with volume below Thursday and lighter than the 30 day moving average.  The daily market data in the past week has been strong-volume down-days and light-volume up-days.  This pattern of data is typical of markets that are about to decline.  Our automated pattern recognition software has not identified a predictive pattern to suggest a decline will occur, but this type of data is inconsistent with a growing market.  The up-tick on Friday was just enough to reverse the stop loss trigger, so our forecast has returned to a growth trend.  Should the S&P 500 decline about 4 points on Monday (-0.2%) our forecast would likely return to an uncertain trend.

Subjective Comment:

Friday’s up-tick was not sufficient to change our subjective opinion about the fragility of the market relative to the US M2 money supply growth rate.  We see the reversal of our automated forecast as noise.  Our software forecast is susceptible to noise when markets reach turning points, and that is what we think is happening right now.  The turning point will either be a period of volatile sideways movement (if US M2 growth accelerates) or a market decline (if US M2 growth remains small or turns negative).  Please re-read our post published 2/21/13 for a full discussion of the US money supply.  As you review this previous post, compare what we wrote to the chart below.  The chart shows the decline in US M2 followed by an unclear up-tick in the past few data points.  The thin red line shows all of the accelerated growth has been reversed and M2 is now where it would have been if the growth rate had stayed at 6.7%.  The chart also shows that for the last few years M2 has grown around 6.8% with some accelerations and slowdowns along the way.  A bubble boom is caused by the acceleration compared to the prior growth rate.  That’s why 14% growth was causing a bubble boom.  The Fed is printing money to try and drive the bubble, but US banks are allowing the printed money to pile up as excess reserves.  As long as the banks sit on this money and do not accelerate lending, the current bubble boom is going to pop.  Our concern over the much longer horizon is that US banks will eventually lend aggressively.  This would drive a bubble boom and massive price inflation.  Continue to avoid all bonds, hold cash and stay out of US equity markets right now.  We will continue to process the daily market data and watch US M2 and provide commentary about the impact all this will have.  Price inflation hedges remain a good investment if you are able to hold those positions for the long term.  In the mean time we encourage you to learn more about the Austrian Business Cycle Theory.  ABCT explains how the bubble-boom and bust cycle happens.  ABCT is the basis for our subjective recommendations.