For Friday April 26, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stock markets right now, even though our automatic forecast predicts market growth.  Price inflation hedges remain good long-term investments despite last week’s drop in the price of precious metals.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 advanced 0.4% on Thursday with volume above Wednesday and higher than the 30 day moving average.  Thursday was a strong-volume up-day.  The week before last saw mostly strong-volume advances.  Last week saw mostly strong-volume declines.  The formation of strong-volume advances this week reinforces the uncertainty regarding the future direction of the market.  It will take a sustained trend, in either direction, in order to get a better idea what the future direction of US markets will be.  If the S&P 500 were to decline about 30 to 31 points on Friday (-2%) our stop loss algorithm would likely trigger and change our automatic forecast to an uncertain trend.

Subjective Comments:

Last week the market was mostly down on stronger volume.  The upward movement this week has not been enough to change the overall patterns and could just as easily be considered volatility as the market tops.  One method of technical analysis is a charting technique where wedges are drawn around the market trend.  When the market index moves above or below the wedge it is considered a breakout.  This technique should not be used as a sole means of forecasting the market direction, but the S&P 500 did break below the wedge which suggests downward movement is likely.  Wedge breakouts are not always accurate, but it is a technique followed by some investors.  To the extent those investors react to the breakout and sell, this could cause some market weakness.

We have analyzed the US M2 (not seasonally adjusted) money supply data published weekly by the Federal Reserve.  US money supply continues to grow, but only from the Fed’s money printing program (called Quantitative Easing).  US bank reserve data will not be updated until next week, but the money supply only increased by $20.8 Billion from last week, ant that’s right at the $85 Billion per month rate of the Fed’s current QE printing.  The straight-line growth of US M2 for the past 12 weeks is not 12.8%, so the rate of growth continues to accelerate over the short term.  The long term growth over the past 20 months remains around 7.7%.  It is possible the US economy and stock market could continue the current bubble-boom if M2 grows around 13%, but we’re not sure this will be the growth rate.  If US banking reserves continue to trend as we mentioned last week, then M2 growth should slow.  US M2 had been growing at 14% for 19 weeks from mid-September through mid-January.  Then M2 shrank dramatically and resumed growing at 12.8% for the most recent 12 weeks.  That drop is why economic data have started to show signs of a slowing economy.  It is unclear if the recent M2 growth acceleration will be enough to compensate for the drop and keep the bubble going.  We remain unable to provide our readers with a good forecast.  There is just too much uncertainty right now.

Within the US M2 trend is a sub-cycle where the growth slows every 4th week.  This sub-cycle suggests the next data point will not grow as much as the prior 3 weeks.  The control chart technique we use to track the residuals will tell us if this sub-cycle persists, and if the drop is in-line with the recent growth trend or if it is different.  We think the slowdown in US bank lending, as shown last week by the declining level of required reserves, is going to start slowing the US M2 growth rate.  The 4-week sub-cycle might mask this next week and extend our uncertainty for at least another 2 weeks.  If the M2 residual drops below the lower control limit next week, that would be a confirmation the shrinking banking reserves are slowing M2’s growth.

We want to welcome those of you who have become regular readers.  The statistics for our website show there are more of you in the past few weeks.  We are very happy you’re here.  To our readers who have been with us longer, thank you for your recommendations.  When we get additional readers and donations it provides tremendous motivation to continue our daily commentary.  Thank you!

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