For Monday April 1, 2013, We Recommend Against Investing

Updated

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Investment Recommendations:

We do not know if US markets will resume their recent growth trend or if they will turn down.  We are seeing data that could be pointing to continued growth.  We’re not yet recommending investing in US markets, but our recommendation could change in the coming week or two depending on what develops.  Price inflation hedges remain viable investment options.  Continue to avoid all bonds as they will fall in price when price inflation accelerates in the near future.  Avoid TIPS bonds and municipal bonds as well.

Technical Comments:

The S&P 500 advanced 0.41% on Thursday, closing at a new all-time high of 1,569.19.  Thursday’s advance was on volume above Wednesday but below the 30 day moving average.  Although below average volume, Thursday can be considered a strong-volume up-day.  If additional such days should occur in quick succession with volume above average, this would indicate market strength and the likelihood of growth.  Thursday was a single such day after nearly a month of weak market patterns, so no action should be taken based on Thursday alone.  If the S&P 500 declines about 23 points on Monday (-1.5%) our stop loss algorithm is likely to trigger and change the market forecast to an uncertain trend.

Note: Markets are closed on Friday.

Subjective Comments:

The Federal Reserve published weekly money supply statistics and we have analyzed the growth rate trends of US M2 (not seasonally adjusted) data.  US M2 has nearly recovered to the level it was at 3 months ago and the current growth rate is now at 10.5% annualized.  While this is not near the 14% annualized growth for the preceding 5 months the combined growth rate over the past 7 months is 8.6%.  For the half year preceding the past 7 months the annualized growth rate was 4.8%.  Three months ago when M2 collapsed with strong negative growth followed by a slow positive growth we sounded the alarm.  We were very concerned the deceleration would trigger a market reversal as explained by Austrian Business Cycle Theory (ABCT).  Now that growth is back at 10.5% and M2 has recovered its drop, it appears quite possible the bubble-boom could continue.  Based on ABCT we now see much less risk of downward movement in the market.  However, there has been a 4-week sub-cycle in the M2 data and it is possible the 10.5% rate could slow with the next 1 to 2 weeks of data if this sub-cycle persists.  The M2 money supply needs to be watched very closely for the next 2 weeks to see if the growth rate slows, holds steady or accelerates.  It has been accelerating.  If acceleration continues then ABCT predicts a continued bubble-boom for a while longer.  The duration of the bubble will depend on the strength of M2 growth.  Accelerated money supply growth means price inflation will be stronger, so this is not a good thing.  It also means when the crash does come it will be even worse than if the economy and markets were to crash now.

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While watching M2 carefully it is now very important, we will also watch what the daily S&P 500 market data patterns do.  For almost a month the daily patterns have been more consistent with a weak market.  Thursday saw a single day of market data that points to potential growth, and it occurred with the S&P 500 reaching a new all-time high.  Over the next week if we see additional strong-volume up-days we will become more bullish.  Next Thursday US banking reserve data and M2 money supply data will be available for analysis.  If that data proves bullish too, we are likely to change our subjective recommendation to “Invest for Growth”.  We don’t want to surprise our readers with a sudden change in our investment recommendation, and it is possible the data could still turn negative.  We’re starting to see indications of continued growth and will continue to evaluate the data and comment accordingly.