For Friday March 1, 2013, We Recommend Against Investing

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Technical Comment:

The S&P 500 declined 0.1% Thursday on volume higher than Wednesday and above the 30 day moving average.  Thursday qualifies as another strong-volume down-day, marking the 5th such day in the past 9 trading sessions.  The combination of strong-volume down-days combined with weak-volume up-days has created a fully formed pattern in the daily market data.  The pattern that has formed has little predictive value, but it is noteworthy all the same.  In the past when the current pattern has occurred, 50% of the time the market advanced and the other 50% of the time the market declined.  Our automatic forecast remains for a growth trend, but this is from the reversal of the stop loss trigger.  Should the S&P 500 decline about 13 points on Friday (-0.9%) our automated forecast could change to an uncertain trend again.

Subjective Comment:

The S&P 500 was up most of the day and then gave up all of its gains to close down just a bit.  Most of Thursday’s trading volume occurred at the end of the day coincident with the index decline.  The technical pattern identified by our software must be interpreted in combination with the US M2 money supply growth rate for a subjective evaluation of the direction of the market.  The M2 money supply data (not seasonally adjusted) has been published through 2/18/2013 and the growth rate over the past 5 weeks remains 4.3% annualized.  Austrian business cycle theory explains that a growing money supply is not sufficient to create a bubble boom.  What is needed is an accelerating money supply growth rate.  Prior to 5 weeks ago US M2 had been growing at 14% annualized for 5 months.  US M2 dropped dramatically and has remained at a 4.3% growth rate since.  For a more detailed explanation of the significance of this change we recommend our post from last week.  In addition, this post includes a graph of the money supply growth, and it has not changed with the most recent data.

The identification of a fully formed pattern from our automated software is a rare occurrence.  The combination of its formation in conjunction with the collapse in the US M2 growth rate is connected.  US banks have scaled back the origination rate of new loans, and this is greatly increasing the risk the bubble boom will end much sooner than later.  When a bubble boom ends, a crash ensues.  It would be very risky to assume US equity markets will decline from here.  It is likely to happen, but it must be remembered the Fed is printing $85 Billion per month of new money and US banks have over $1.7 Trillion of excess reserves.  If US banks decide to accelerate the rate of new loan originations, the bubble boom could easily resume.  Every week that goes by with US M2 growing below 14% now risks stagnation of bubble boom for the US economy and stock market.

Avoid US equities.  Investing in US stocks is not advisable given these circumstances.  Avoid all bonds, including TIPS.  The slowing US M2 growth means price inflation could be delayed a while longer, but with M2 still increasing eventually price inflation will accelerate.  When that happens, bond prices will fall.  If you own any bonds, sell them.  If you don’t own bonds, continue to avoid them.  Price inflation hedges are now a tricky investment.  Hold your price inflation hedges for the long term.  Adding to price inflation hedges is up to you.  Be sure to do your own research on that topic.  Holding and accumulating cash is not a good long term strategy, but it might be wise for a short while as we wait to see what develops in US markets.  If US banks continue to hold back on originating new loans there will eventually be a crash.  When the crash starts and awareness of it spreads it becomes very difficult for the Fed to print enough money to reverse it.  If a crash appears imminent, having cash on hand offers an opportunity to short the market.  We are now watching our automated process for patterns that would signal a declining market.  We have no idea why US banks have changed their lending behavior.  We could speculate, but that is not useful to our readers.  The best advice we have right now is avoid the US equity markets.  It is not clear what will happen next.  Please disregard our automated forecast and hold cash.

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