For Monday March 4, 2013, We Recommend Against Investing


Technical Comment:

The S&P 500 advanced 0.23% on Friday with volume below Thursday but above the 30 day moving average.  In the past 2 weeks the market has advanced on light volume and declined on strong volume.  Friday was no different from this pattern, and the pattern matches historic turning points.  In the past when this pattern has occurred, half the time the market moved sideways and then resumed an up-trend, the other half the market declined.  Either way, it makes sense to wait and see which direction the market will go before investing.  If the S&P 500 declines about 18 points on Monday (-1.1%) our stop loss trigger could change our automated forecast back to an uncertain trend.

Subjective Comment:

The political rhetoric flowing from Washington D.C. regarding sequestration cuts might have some market investors spooked, but this is just unimportant political drama that has no bearing to the overall trend of the market.  Weeks ago the money supply growth (US M2 NSA) collapsed.  Austrian Business Cycle Theory explains why this must eventually lead to a crash.  A crash will come; it is just unclear when this might occur.  As long as US banks maintain their current rate of lending US M2 will not accelerate sufficiently to delay the collapse much longer.  A market crash and an economic slump are unavoidable.  All of the prior money printing has manipulated interest rates much lower than where they would have been.  This has caused too many resources to be misallocated to unproductive ventures.  The crash is the process of the market correcting these mistakes.  If the money supply grows at a strong enough rates, the mistakes can be masked and the crash delayed, but it cannot be avoided.  The Federal Reserve is still printing $85 Billion of new money every month, but US banks are accumulating this money in the form of Excess Reserves.  As long as US banks hold this cash, price inflation will remain mild and the Fed printing will be unsuccessful in avoiding a market crash.  With $1.7 Trillion of Excess Reserves, US banks could resume aggressive lending at any moment.  What will happen in the next several weeks is really up to the actions of the Fed and US banks.  It is unwise to invest until it becomes clear which path they will choose.

Avoid all US equity markets until the current uncertainty is resolved.  Avoid all bonds, including TIPS.  Price inflation hedges remain a good investment to hold, but there could be large price swings in the near term, especially if the money supply actually starts to shrink.  For this reason we encourage you to do additional research before accumulating more hedges against price inflation.  If you do not own any price inflation hedges, we do recommend accumulating some.  It is up to you to determine the best mix for your portfolio.  If you have cash available to invest, we suggest holding for a few weeks until the market direction becomes clear.  If a crash starts to develop, you can invest your cash in index funds that grow when the market falls.  If banks begin accelerating money supply growth again, then you can invest in funds that grow with the market.  Since our pattern recognition software identified the 50/50 pattern, it really is a guess if markets will grow or shrink from here.  Without additional knowledge, investing now is a guess and we do not think guessing is a good idea.  We always publish what our automated forecast shows, and it is forecasting market growth.  For all the reasons we’ve just outlined, we urge you to hold cash and not invest right now.

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