For Tuesday February 26, 2013, We Recommend Against Investing

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Technical Comment:

The S&P 500 declined 1.8% Monday with volume above Friday and above the 30 day moving average.  This was a strong-volume down-day, marking the 4th such day in the past 6 trading sessions.  This is still not a fully formed pattern with predictive value, but it is a lot of strong-volume down-days in a short period of time.  The daily market data is strongly suggesting continued upward movement in the market is unlikely.  The large drop of the S&P 500 index on Monday was more than sufficient to again trigger our stop loss algorithm and change our automated forecast to an uncertain trend.  The index would have to advance about 16 points on Tuesday (+1.1%) to reverse the stop loss trigger and change our forecast to a growth trend.

Subjective Comment:

When the market reaches turning points there is usually higher volatility in the daily changes of the market indices.  This volatility can cause our automated forecast to change frequently, and this is what we think is happening.  The previous up-trend in US markets appears to be at a turning point.  We don’t know if this turning point will be a volatile, sideways-movement (plateau) for a while, or if it will become a down-trend.  The daily market data and our automated pattern recognition software are suggesting continued growth is highly unlikely.  When this is combined with the recent collapse in the US M2 growth rate and associated changes in US banking reserves data, we think all the data points to an end to the current bubble-boom.

We recommend selling US equity positions and holding cash.  Avoid all bonds and hold price inflation hedges.  If you are able to hold an investment for a long period of time, you might consider adding to your price inflation hedges.  There will be news this week of political drama that could be contributing to market volatility.  This is just more reason to step aside and let the market play out until it becomes clear what is happening.  The next US M2 data update is Thursday evening.  Until then we are not likely to change our subjective investment recommendation even if our automated forecast should bounce about with the market.

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