For Friday April 12, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stocks right now, but be prepared to invest for growth in the near future.  US money supply growth is accelerating.  This means price inflation will occur and that there are increased chances the current bubble-boom in the stock market will continue.  Price inflation hedges remain good long-term investments, and continue to avoid all bond investments across the board.

 Technical Comments:

The S&P 500 advanced 0.36% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  This was a light-volume up-day and does not contribute to pattern formation with the recent stronger-volume up-days.  Our technical analysis continues to show no good predictive pattern to indicate the future direction of the market.  Our automated forecast is for market growth because we have not seen a pattern to suggest a change will occur.  If the S&P 500 declines about 36 points on Friday (-2.4%) our automated forecast could change to an uncertain trend.

Subjective Comments:

The weekly US M2 (not seasonally adjusted) money supply data has been published by the Federal Reserve and we have analyzed the growth trend.  Over the past 10 weeks the straight-line-fit annualized growth rate is back up to 11.4%.  This is not quite the 14% annualized growth that occurred from mid-September to mid-January, but the difference between these rates now seems immaterial.  The average growth rate from August 2011 through early September 2012 was 6%.  Since then through April 1st, which is the most current data available, the average growth is 9.3%.

We have been very concerned since early February when the 14% growth rate collapsed and the money supply shrunk by $236 Billion in 3 weeks, which was a -39% rate (annualized).  US M2 has recovered completely and set a new high on April 1st at $10.64 Trillion Dollars.  The large drop in February turned out to be very short and M2 growth has recovered.  We think the money supply drop is why our pattern detection software has seen so much ambiguity in the daily technical patterns of the S&P 500 data.  The recent strength in the market is too new to declare an up-trend.  However, the timing of the strong-volume up-days with the re-acceleration of the money supply growth rate would seem to be more than coincidental.  This correlation is consistent with Austrian Business Cycle Theory.

There was no update in the US banking reserves this week as that data series is updated biweekly.  That data had been showing US banks accumulating the $85 Billion of Quantitative Easing as excess reserves with required reserves remaining flat.  There was a slight change in this last week, but at the time we thought it was just noise in the data series.  The slight change was a slowdown in excess reserve growth.  Since the money supply (M2) continues to accelerate, then US banks must be accelerating their lending.  This would be consistent with a slowdown in excess reserve growth.  We do not want to place too much on last week’s US banking reserve data because those data are very noisy.  If US banks are accelerating their lending then next week’s data should confirm such a change.

When the money supply grows at an accelerating pace a bubble-boom is created.  When the growth slows or the money supply shrinks, the bubble will eventually pop.  It is very possible the recent slow-down in the money supply has been short enough that the necessary and inevitable bust could be delayed.  How long it might be delayed is impossible to guess, but the stronger and longer the Money Supply grows, the stronger and longer the bubble will be.  We now think it is much less likely US markets will decline in the future and we are moving our subjective bias in the direction of market growth.  If the daily market data continues to show strong-volume up-days for the next week, and if the money supply updates next week show even more accelerated bank lending and M2 growth, then we are likely to change our subjective investment recommendation to “invest for growth”.