For Tuesday March 26, 2013, We Recommend Against Investing


Investment Recommendations :

Avoid US markets.  We do not if US markets will resume their recent growth trend or if they will turn down.  We see plenty of risk of a downturn, but US banks could resume aggressive lending and reignite a bubble-boom.  Uncertainty reigns and this is why we recommend against investing in US stocks right now.

Technical Comments:

The S&P 500 fell 0.33% on Monday with volume above last Friday but below the 30 day moving average.  Our pattern detection software classified Monday a strong-volume down-day, the 4th such day in the past two weeks.  Our technical analysis continues to suggest US markets will remain weak and are susceptible to decline.  Monday’s drop was not enough to trigger our stop loss algorithm, but if the S&P 500 drops about 4 points on Tuesday (-0.2%) our automated market forecast could change to an uncertain trend.

Subjective Comments:

The situation in the Eurozone is getting serious.  The situation in Cyprus appears to remain unstable despite implementation of capital controls.  A tax would not pass the national legislature, so they are imposing a “levy” instead of 40% on deposits above 100,000 Euros.  Of course this could still change, but it appears it will go forward.  What shocked markets on Monday were comments from Dutch Finance Minister Jeroen Dijsselbloem (pronounced Diesel-Boom).  He said the approach in Cyprus could be considered a template for handling similar situations in other Eurozone countries.  He quickly backtracked and attempted to un-say what he said, but it was too late.  Shortly after his comments markets turned down for the rest of the day.  Uninsured depositors in Eurozone banks now must worry they will be among the first to incur losses when the inevitable bank bankruptcies occur.  We expect many customers will be withdrawing money from Eurozone banks in the coming days.  The European Central Bank has not accelerated the growth rate of the Euro money supply for years, so the capital structure of the economy is struggling.  The Cyprus debacle appears to be the trigger for a further fall in Eurozone markets and economic depression.  Spillover to US markets is likely.

From the daily US market data and US money supply statistics we analyze, it remains unclear if US banks will resume aggressive lending or not.  As long as bank lending and the resulting money supply growth remains lower than it has been, the US is unlikely to continue the bubble-boom.  Austrian Business Cycle Theory explains that accelerating money supply growth is needed for a bubble-boom to continue.  There is still time for US banks to accelerate and continue the current bubble-boom, but it is unclear if they will.  To the extent the banking problems in the Eurozone are making US bankers nervous, US banks could be unwilling to accelerate lending.  This might be the reason the Fed’s money printing is only growing excess reserves in US banks.  People hold larger cash balances as a way to deal with uncertainty.  Uncertainty is what we see.  We don’t know how much of the Eurozone crisis will spillover to US markets.  We don’t know if US banks will accelerate lending or not.  Uncertainty is why we are recommending to our readers avoiding US markets right now.

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