For Monday March 18, 2013, We Recommend Against Investing

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Investment Recommendations:

Despite our automated forecast of a growing US stock market we recommend against investing in US equities.  We see technical weakness from our pattern detection algorithms and the US money supply growth has slowed to about 6.5% annualized, which is less than half the previous 14% growth rate.  Avoid US stock markets right now.  Instead consider price inflation hedges as alternatives to stocks.  Avoid all bonds including TIPS.  We expect price inflation will get worse and bond prices (including TIPS bonds) will fall as a result.

Technical Comment:

The S&P 500 declined 0.16% on volume higher than Thursday and above the 30 day moving average volume, resulting in a strong-volume down-day.  Friday’s volume was the strongest single day volume in the past 3 months.  In the past week the market had 2 light-volume up-days and 2 strong-volume down-days.  Thursday was a strong-volume up-day but with below average volume.  Thursday is really a neutral day in the pattern with the rest of the week suggesting the market might be turning down.  Our recognition software has not identified a predictive pattern, but the data is consistent with market declines.  Should the S&P 500 decline about 8 points on Monday (-0.6%) our automated forecast could change to an uncertain trend via the triggering of our stop loss algorithm.

Subjective Comment:

The money printing from the Federal Reserve continues at $85 Billion per month and price inflation will eventually accelerate.  The official Consumer Price Index published on Friday showed an increase of 0.7% with the “All Items” index up 2% over the past 12 months.  The 0.7% jump was the largest gain since June 2009 (hat tip EconomicPolicyJournal.com).  MIT’s Billion Prices Project shows price inflation is growing and Shadowstats.com shows the CPI as calculated by the 1980 method is near 10%.  Money printing and bank credit expansion always causes a bubble-boom and often creates price inflation as well.  Price inflation can be mitigated by gains in labor productivity, but we doubt productivity gains will compensate for the massive money printing that has occurred in the past 4 years.  This will all end badly.  What is unknown is when the crash will come.  US banks are lending new loans at near the same rate old loans are maturing.  This means net new lending is essentially zero.  The Fed’s $85 Billion of monthly credit creation is staying in the banks as shown by growing excess reserves.  If US banks continue net lending at the current rate the bubble-boom will end soon.  There is still time to sell any US stocks you own before a crash occurs, but don’t wait.  If banks accelerate lending, they can delay the crash for months.  If banks accelerate lending enough the bubble will continue to grow and there will be an opportunity to invest again.  If a crash gets closer our pattern recognition software is likely to identify an opportunity to short US markets.  In order to take advantage of resumed bubble growth or a possible crash you will need to have part of your investable funds available in cash.

We encourage our readers to seek multiple sources of information in addition to our daily commentary.  Our area of expertise is a forecast of US markets based on proprietary technical analysis of the S&P 500 combined with subjective interpretation of the US money supply growth using Austrian Business Cycle Theory (ABCT) as the basis for analysis.  If Austrian Economics is an unfamiliar topic, we highly encourage you to learn more about it.  We suggest starting with the Ludwig von Mises Institute.  For a video with cheesy sound effects and a great explanation of ABCT we suggest this 1-hour presentation by Roger Garrison.  If you only have 5 minutes to spare, here’s a quick video giving a simple overview of ABCT.

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