For Tuesday April 30, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US stock markets right now, even though our automatic forecast predicts market growth.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 advanced 0.72% on volume lighter than Friday and below the 30 day moving average.  Monday’s S&P 500 volume was the lightest so far in 2013.  As a light-volume up-day, Monday continues last week’s pattern formation of market weakness.  Market strength would be show by up-days with strong volume and down-days with light volume.  The opposite is what happened all last week and again on Monday.  The S&P 500 is making all-time highs. It is unclear if it will continue to advance or not.  If the S&P 500 were to decline about 34 points on Tuesday (-2.1%) our stop loss algorithm could trigger and change our automated forecast to an uncertain trend.  Our automated forecast is based entirely our technical analysis and not our opinions.

Subjective Comments:

Here in the subjective comments we offer our interpretation of the money supply and potential market direction using Austrian Business Cycle Theory (ABCT).  US M2 money supply and the growth rates over the past 20 months suggest US markets could be nearing a top.  This comes from the fact that the growth rate for nearly 2 years has been little changed.  ABCT describes how an accelerated growth rate is needed to initiate and sustain a bubble-boom.  A constant growth rate will not sustain a bubble, and that could be the current situation.  However, US M2 is accelerating, but only when measured over the short period of the past 3 months.  If this 3-month trend continues it is possible the bubble-boom in US stocks and the US economy could continue a while longer.  There are too many factors involved to make a guess what will happen.  This is why we rely upon both ABCT and our proprietary technical analysis for an overall interpretation and subjective recommendation.  Unfortunately both the money supply growth and our technical indicators are giving us an unclear picture of the future direction.  This is why we recommend holding a cash (risk of) position.  Avoid US equity market index funds right now.

We have commented frequently about the high likelihood of price inflation as a direct result of the on-going money printing from the Federal Reserve.  While official US CPI is around 2%, the 1980 methodology shows CPI is around 9% (hat tip  MIT’s Billion Prices Project shows the US Daily online price index has moved higher recently.  Price inflation will cause one of two possible outcomes for bond prices, and possibly both outcomes.  One possible outcome is that bond investors will demand a higher yield to compensate for the loss of purchasing power from price inflation. This would drive bond prices down from their current level.  The other possible outcome is the Federal Reserve decides to stop printing money so fast and scales back their purchases of Bonds.  The Fed would do this as a means to fight price inflation.  The result would be a drop in demand, which in turn drops the price of bonds via the economic law of supply and demand.  Both events could happen, but either way bond prices will eventually go down.  Please read this short post from for their opinion about bond investments.  You will see this opinion about the potential for bond prices to decline is shared by others.

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