For Thursday March 21, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets right now.  Consider putting part of your portfolio into price inflation hedges.  Only invest the portion of your portfolio that you can leave invested for a long period of time and expect near term volatility.  Avoid all bonds including TIPS because all bond prices will fall when price inflation accelerates.  Prices are already going up as a result of the Fed’s money printing.

Technical Comments:

The S&P 500 advanced 0.67% on Wednesday with volume below Tuesday and lighter than the 30 day moving average.  This made Wednesday a light-volume down-day.  Light-volume down-days are not necessarily a bearish indicator in isolation, but when combined with strong-volume down-days they contribute to a pattern indicating market weakness.  In the past 4 trading sessions there have been 2 strong-volume down-days combined with light-volume up-days.  This is the type of pattern that is not typical prior to market growth.  A fully formed pattern with predictive value has not been identified, but the general patterns are not providing insight about the future direction of US markets.  Our automated forecast returned to growth because the S&P 500 advance was enough to reverse the trigger in our stop loss algorithm.  Should the S&P 500 decline on Thursday by about 9 points (-0.6%) the algorithm could trigger again and change our forecast back to an uncertain trend.

Subjective Comments:

Do not react to the change in our automated forecast.  Our stop loss algorithm is susceptible to volatility that occurs near changes in market trends.  The algorithm is designed to follow a growing market and provide a warning if something changes unexpectedly.  With the recent collapse of the US M2 money supply growth rate we are in a situation where a market turn is expected.  Using Austrian Business Cycle Theory to interpret the money supply growth is how we know when the stop loss algorithm is more or less reliable.  Thursday afternoon the Federal Reserve will publish the weekly money supply statistics.  We will analyze the growth rate and update our comments accordingly.

The Fed’s FOMC met Tuesday and Wednesday this week and today announced what amounted to no change in monetary policy.  The market jumped immediately following the release of information and then faded a bit but still closed the day up prior to the day before.  The Fed is trying to keep the bubble-boom going by printing $85 Billion per month.  If US banks continue to allow the new money to accumulate in excess reserves then the Fed’s crazy money printing will not cause the money supply to grow fast enough to sustain the current capital structure of the US economy.  Only US bank lending can keep the bubble growing right now.  In addition to the weekly M2 data, tomorrow the biweekly banking reserve data will be published.  We will also review those trends and provide commentary.  We wish the Fed would stop printing.  The end result of money printing is always economic chaos and often includes serious price inflation.  Argentina is a case in point, in addition to numerous historic examples.

In Cyprus in now appears banks will remain closed through Monday while capital controls are considered.  Cyprus ATMs are low on cash and some businesses are refusing to accept credit card payments.  Opinions seem to be settling on two options for Cyprus at this point.  One option is a bailout from Russia, and the other option is exiting the Eurozone.  There is plenty of speculation what might happen, including thoughts about a spreading desire among various countries to impose a wealth tax of one sort or another.  These actions and many others always have the potential to impact US markets.  What matters most is the growth rate of the money supply.  If the M2 growth is strong enough it will overwhelm all other factors.  If it is too weak US markets will crash.

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