For Friday March 15, 2013, We Recommend Against Investing

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Technical Comment:

The S&P 500 advanced 0.56% on Thursday with volume above Wednesday but below the 30 day moving average.  Thursday was a strong-volume up-day, but the strength of the volume was not impressive since it was below the average volume.  This week continues to be dominated by daily market data inconsistent with market growth.  The market data is not showing a clear direction for the future trend of the market.  Should the S&P 500 decline about 16 points on Friday (-1%) our automated forecast is likely to change to an uncertain trend from our stop loss algorithm.

Subjective Comment:

It does not matter that the S&P 500 ended the trading session within 2 points of a record close.  The market advance has been on light volume.  When the market advances on strong volume it is much more likely continued growth will follow.  The combination of the daily patterns with the weakness in the money supply growth remains concerning and we’re not sure the current bubble-boom will continue.

We have analyzed the US M2 money supply statistics and the growth rate remains very low compared to the 14% annualized growth that occurred from mid-September through mid-January.  After a large drop in the money supply in late January there are now six weeks of data for estimating a new growth rate.  Last week with 5 weeks of data it appeared the growth rate was 1.2%.  With the new data through 3/4/13 the growth rate now appears to be 6.5%.  US M2 jumped up $121 Billion in one week.  This is not unusual given the typical variability in the data, but over a short period it does create a highly variable growth rate when fitting a straight line through so few data points.  There has been a 4-week mini-cycle in the M2 data, and this appears to have re-emerged.  The mini-cycle might suggest the $121 Billion jump will be followed by 4 weeks of lighter growth.  The other possibility is US banks have accelerated lending and the money supply is responding.  The biweekly banking reserve data will not be updated until next week, and even then the data is about 10 days old when published.  It will be a few weeks before the picture becomes clear from the money supply and banking reserve statistics.

Here is where we are.  Three weeks ago our pattern detection software identified a data formation that in the past has indicated a 50% chance of growth or a 50% chance of decline.  Since then the daily market data has not shown a consistent pattern to resolve the uncertainty.  The US M2 money supply had been growing at an annualized rate of 14% and then collapsed.  In the past 6 weeks the growth rate has been unclear and now appears to be accelerating again, or it could be statistical noise.  This leaves us in the same position we’ve been in for several weeks now; wait-and-see.  Investing in US markets right now seems imprudent based on this information.  It remains a coin-toss regarding the future direction of the market.  Under these circumstances we advise holding and accumulating cash so you can invest once the market direction becomes clear.  However, holding cash makes us nervous because we are expecting the purchasing power of the US Dollar to decline as price inflation heats up.  The best we can recommend is researching price inflation hedges and investing a part of your portfolio accordingly.  Remember to hold any investments for a long time, so only move the portion of your portfolio you can leave invested for the long term.  Avoid all bonds as they will decline when price inflation accelerates.

2 Responses to For Friday March 15, 2013, We Recommend Against Investing

  1. weakleykevin says:

    So basically you’re saying you don’t know what’s going on; while telling people to hold your cash or take it out of market but not too much. This type of commentary is precisely the problem say you don’t know if you don’t know. Banks are lending I find it hard to believe, as a regular individual it’s very hard to acquire a loan in this market. Banks are lending to people with high net worth attempting to ensure return which is not completely unreasonable, but as you know it will do nothing to help this economy. Point being that if money doesn’t circulate outside of a small few then where are the possibility for growth in the economy….The stock market is raging as we all see, but the question remains is the growth sustainable? Not in my eyes unless you have a different class people who can invest, or were looking as a classic bubble based on potentially false gains of the corporations. After all, how can a market be doing so well in a country where buying power of regular people has shrunk?

  2. Thank you for the comment.

    Please accept our apologies for any confusion. Our comment about bank lending was about the net lending. New loans are indeed being made, but right now the required reserves of US banks show the rate of new loans is essentially the same rate of old loans being paid off. When banks lend new loans faster than old loans mature it causes the overall money supply to grow via the money multiplier inherent within fractional reserve banking systems. Our comments about bank lending were perhaps too brief and we should have emphasized “net lending” to avoid confusion.

    You asked if the stock market growth is sustainable. The current bubble-boom is another business cycle and it is not sustainable. Austrian Business Cycle Theory explains how the bubble-boom is created by accelerated growth of the money supply, and such booms are always unsustainable growth. The bubble-boom growth ends when the money supply growth rate slows. The only other alternative is the calamity of hyperinflation, but that happens only if the money supply continues to grow faster and faster. Usually price inflation causes central banks to slow their money printing operations and avoid that outcome, although plenty of damage still occurs. What we try to provide with our comments is insight when a bubble-boom will start, and when it will end.

    Thank you for pointing out how our commentary appeared problematic. We will strive to provide more clarity in our recommendations.