For Friday April 19, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US stocks right now.  Price inflation hedges remain good long-term investments despite Monday’s drop in the price of precious metals.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 declined 1.4% on Wednesday on volume above Tuesday and higher than the 30 day moving average.  The S&P 500 declined another 0.7% on Thursday with volume below Wednesday but above the 30 day moving average.  Wednesday was a strong-volume down-day, while Thursday could be classified as either a light or strong volume down-day.  Our pattern detection software only classified Wednesday as strong-volume down.  Both Wednesday and Thursday continue to contribute to an overall negative pattern development, although a fully formed predictive pattern is not yet present.  The S&P 500 would have to advance about 16 points on Friday (+1%) to reverse our stop loss trigger and return our automated forecast to a growth trend.

Subjective Comments:

We have analyzed the US M2 Money Supply (not seasonally adjusted) data that is published every Thursday by the Federal Reserve.  We have also analyzed the biweekly US banking reserve data that was also published on Thursday.  This data strongly suggests the current bubble boom in US stocks is ending.

The M2 money supply continues to grow, but it is not clear the rate of growth will be sufficient to sustain the bubble boom.  Over the past 11 weeks the M2 growth rate is 12.3% annualized.  Over the past 13 months M2’s average annual growth has been 7.5% which is barely changed from the 7.3% annual growth from the preceding 7 months.  Austrian Business Cycle Theory (ABCT) explains that an accelerating growth rate is necessary to initiate and sustain a bubble-boom.  Over the past 20 months the M2 annual growth rate has barely changed.  M2 growth had accelerated late in 2012, but about 3 months ago M2 experienced a sharp drop for 3 weeks which brings us to the most recent 11 week trend of 12.3% annualized growth.  If M2 were to continue to grow at the 12%+ range this would be acceleration over the 7.5% and a bubble boom could be sustained.  It appears the US economy and stock market could be too weak to continue without much more aggressive M2 growth.  If a crash starts it will perpetuate itself.  It is possible US banks could accelerate lending and the M2 growth rate could jump.  While possible, it appears this is unlikely.

We think it is unlikely US banks will accelerate lending because the US banking reserve data clearly shows US banks have recently slowed their lending rate.  Required reserves are a data series with a lot of noise, so it takes a while before a change in trends becomes obvious.  Over the past 10 to 12 weeks it is now clear Required Reserves have begun to shrink.  They had been growing, but not anymore.  US banks are still lending, it is just that their existing loans are maturing faster than new loans are being originated.  The net effect is the shrinking of Required Reserves.  When this happens the Money Multiplier works in reverse and shrinks the money supply.  The Money Supply is not shrinking, but the downward trend in Required Reserves means the Money Supply is unlikely to keep growing.  It is much more likely the US M2 money supply growth rate will slow as a result of shrinking required reserves.  Excess Reserves continue to grow and are almost at $1.8 Trillion Dollars.  The Fed’s $85 Billion of monthly money printing continues to accumulate in US banks as excess reserves, along with the money from maturing loans.

Our pattern recognition software has identified formation consistent with market declines, although nothing definitive has developed.  The US money supply growth rate has not appreciably accelerated in 20 months.  The Fed’s money printing is not causing banks to lend faster, and in fact US banks are allowing existing loans to mature faster than new loans are being originated.  The S&P 500 fell below its 50-day moving average on Thursday.  The 50-day moving average is followed as a technical indicator by many market participants, so this could cause some to start selling their equity positions.  US economic data is showing signs of weakness.  Taken together this information paints a picture of a stock market nearing a crash.  The signs of a bubble-boom continuing are few.  The 11-week annualized M2 growth of 12.3% is the only sign that the bubble could continue a while longer, but the US banking reserves data suggest M2 growth will slow in the near future.  In the past month we saw a week of potential growth patterns in the S&P 500 data, but that was last week.  This week and most of the past month have shown daily data more consistent with market declines.  Our analytical process shows much more on the side of a market decline than of growth.

We urge our readers to move to a cash position and sell all US equities.  With the still-growing money supply there will be increasing rates of price inflation, so cash is not a good store of value and bond prices will eventually fall.  Price inflation hedges have been volatile recently but remain a good investment for the long term.  For any other investment suggestions we urge our readers to do their own research.  If conditions continue to get worse and our automated software starts to identify signals of impending market decline, we will let you know and could recommend taking a short position.  As of now we have not seen enough to recommend shorting US equity markets, but we absolutely recommend against investing for growth.