For Thursday April 4, 2013, We Recommend Against Investing

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Investment Recommendations:

We are seeing more data that suggests continued growth in US markets, although the market drop on Wednesday changes the recent technical trend.  We’re not yet recommending investing but that could change in the coming week or two.  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 dropped 1.1% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  Wednesday was a clear strong-volume down-day with a drop of over 1% in the index.  Prior to Wednesday there had been 3 trading sessions in a row with daily data showing the possibility of market growth.  The strong-volume down-day is a reversal of that trend.  Sometimes single strong-volume down-days occur during market growth.  Other times such days cluster together, and that often precedes further market declines.  Time will tell which will occur.  Wednesday’s market decline was almost enough to trigger our stop-loss algorithm.  It has a subroutine designed to minimize spurious triggering that was invoked, otherwise our forecast would have changed.  Should the S&P 500 drop around 1 point on Thursday that would likely be enough to change our forecast to an uncertain trend.

Subjective Comments:

We do not know which way the market will go from here.  The slowdown in money supply growth over the past 3 months could be impacting the economy.  Austrian Business Cycle Theory (ABCT) explains that the first place where money supply growth acceleration (or deceleration) impacts are those sectors of the capital structure where production output is sold to other businesses (not consumers).  Money supply changes impact interest rates, and in turn very expensive and time consuming products and projects are more sensitive to interest rate changes.  Interestingly the ADP employment numbers for March indicated a net of ZERO new construction jobs.  Another reason for a slowdown in construction hiring could be a temporary shortage in raw materials for the construction industry.  ABCT explains how bubble-booms happen, and why they must always crash.  When the US money supply growth accelerated about a half year ago, the bubble-boom was given fresh fuel and the current economic data shows what appears to be growth.  The stock market has certainly gone up over the last half year.  The money supply has accelerated in the past few weeks, but this has barely made up the loss in the past 3 months.  What happens from all depends on what US banks do next.  If they lend more quickly, the money supply will accelerate its growth and the bubble will continue.  Otherwise US stocks could be in for a plateau for a while and then a decline.  It’s a guess at this point.

We remain confident that price inflation will accelerate in the future.  Geopolitical risk (North Korea) seems to be increasing again, and that could spook investors.  The Eurozone debt crisis will eventually flare up at some point.  We want to see the data produce a clear signal so we can recommend an investment strategy.  As soon as we see clarity, we will advise accordingly.

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