For Wednesday March 27, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets.  We do not know if US markets will resume their recent growth trend or if they will turn down.  US banks could resume aggressive lending and reignite a bubble-boom, but unless and until they do there is downside risk.  Uncertainty reigns and this is why we recommend against investing in US stocks right now.  As an alternative investment we suggest price inflation hedges.  Avoid all bonds as they will fall in price when price inflation accelerates in the near future.  Avoid TIPS bonds as well.

Technical Comments:

The S&P 500 advanced 0.8% on Tuesday with volume below Monday and lighter than the 30 day moving average.  The S&P 500 is nearing its all-time highs, but it is doing so on light volume.  When it has declined in the past 3 weeks, it has typically been on strong volume.  Growth has been on light volume.  This type of daily market data suggests a turning point is approaching and a market decline could be in the near future.  Strong-volume up-days have been very rare.  It is for this reason we are concerned about the daily patterns and do not see technical strength in US markets.  If the S&P 500 were to decline about 17 points on Wednesday (-1.1%) our stop loss algorithm could trigger a change in our automated forecast to an uncertain trend.

Subjective Comments:

US Banks are making loans, but the rate of new loan originations is not keeping the US M2 money supply growing very fast over these past 2 months.  Prior to the most recent 2 months US M2 grew at an annualized rate of 14%, and that is why the US market has been growing and the economy apparently improving.  Austrian Business Cycle Theory (ABCT) explains why an accelerating growth of the money supply creates a bubble-boom.  ABCT goes on to explain how this distorts the capital structure in the economy and must eventually lead to a bust and recession.  The bubble-boom pops when the money supply growth rate fails to continue accelerated growth.  The money supply can still grow, but if it grows at slower rates the bubble will pop.  Direct measures of US M2 growth show a slower growth rate around 9%.  Measures of US banking reserves show required reserves remaining unchanged and excess reserves growing.  This means the Federal Reserve money printing (aka Quantitative Easing) of $85 Billion per month is just ending up and sitting in the banks.  As long as this situation persists the US economy and bubble-boom is at risk of a crash.

The first indications that US banks have resumed aggressive lending would most likely appear in the daily market data.  Instead of the patterns we have been seeing for the past 3 weeks, we would expect to see market growth on stronger volume.  This would soon be verified by accelerated US M2 growth and a change in the US banking reserves.  Unless this happens, we will not recommend investing in US markets.  We remain at a turning point.  Markets could begin a decline or could resume growth.  Until it is clear which will happen, we suggest staying out of the markets and considering other investments.

Comments are closed.