For Thursday March 14, 2013, We Recommend Against Investing


Technical Comment:

The S&P 500 advanced 0.1% on Wednesday with volume below Tuesday and lighter than the 30 day moving average.  The S&P 500 thus registered another light-volume up-day.  This week has seen 2 light-volume up-days and 1 strong-volume down-day.  This type of data is consistent with patterns that occur when markets reach turning points.  Last week saw pattern development that suggested the market might go up.  Now we are seeing the reverse.  However, our pattern detection software has not identified a definitive direction for the market.  The direction from here remains highly uncertain.  If the S&P 500 declines about 12 points on Thursday (-0.8%) our stop loss algorithm could trigger and change our automated forecast to an uncertain trend.

Subjective Comment:

While our automated forecast remains at a growth trend, we see too much weakness in our proprietary algorithms to conclude the market will indeed go up.  When this is combined with the recent collapse in the US M2 money supply growth rate, we remain highly concerned that a market crash is coming.  There will be a lot of economic data published in the near future that indicate improvements in the economy.  This data is reporting on the period from a few months ago when M2 was growing at an accelerated 14% annualized for 5 months.  Austrian Business Cycle Theory describes how accelerated money supply growth causes a bubble-boom, and that’s what the data is showing.  There remains a highly elevated level of cash in the US economy and price inflation will eventually heat up.  The Federal Reserve is still printing new money at $85 Billion per month, but US banks are accumulating the new cash as excess reserves.  As long as US banks refrain from lending the money multiplier will not result in an overall acceleration of the money supply.  US banks are now in the driver seat, and it is the origination rate of new loans that will determine if the current bubble-boom is extended or if it will pop.

Continue to hold and accumulate cash while avoiding US markets.  Look for other investment opportunities.  We suggest part of your portfolio should be in price inflation hedges, so do your own research and determine what is best for your circumstances.  Should it become clear which way US markets will go, then we will make an investment recommendation.  Until then continue to watch the money supply and please check with us every day the market is open.  Remember to avoid all bonds, including TIPS.  Bond prices will fall when price inflation gets worse.

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