For Monday May 06, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stock markets right now, but be prepared to move available cash into leveraged index funds that grow with US markets.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 advanced 1.05% on Friday with volume above Thursday and higher than the 30 day moving average.  Friday’s volume was not the strongest of the week, but it was never the less a strong-volume up-day with the index setting another record high.  This week there were 2 strong-volume up-days.  Last week there were 3 strong-volume up-days.  This marks 2 weeks in a row with daily market data consistent with a growing trend.  It has been 14 weeks since the S&P 500 produced 2 consecutive weeks like this.  About 3 weeks ago on the evening of April 16th our pattern recognition software identified a potential growth pattern.  At the time we downplayed it because of the highly inconsistent daily data.  Now that there have been 2 weeks of mostly strong-volume up-days after that pattern identification, it appears more and more likely the technical indications of market growth are being confirmed.  The S&P 500 would have to decline about 42 points on Monday (-2.6%) to change our automated forecast to an uncertain trend.

Subjective Comments:

Seemingly US markets advanced on Friday in response to the employment statistics.  Certainly it is possible some investors reacted to this news, but is that the entire story?  We think there is more going on than just a drop in official US U-3 unemployment from 7.6% to 7.5% with nonfarm payroll employment increasing 165,000 in April.  In fact a deep dive into the details below the headline shows an employment picture that remains depressed.  ZeroHedge.com provided this analysis with the following key points:

  • While 165,000 jobs were added, US businesses paid $323.2 Million less in total wage compensation because hours worked declined
  • The reduction of $323.2 Million in total wage compensation is equivalent to a loss of 618,000 jobs
  • If the numbers are to be believed, more people are working but less wages are flowing to the labor force

Official U-6 unemployment is 14.5%.  If U-6 were still measured as it was in 1994, it would be close to 23% (hat tip shadowstat.com).

The small change in U-3 from 7.6% to 7.5% seems to be too small to result in a second consecutive 1% daily market advance.  The 1% climb with strong volume had to be supported by money available for purchasing shares of stocks.  Our analysis of the US M2 money supply and US banking reserves posted yesterday describes the big change in bank lending.  There is always a time delay in the money supply and banking reserve data, so the increased lending noted in yesterday’s data could easily be connected to the available cash likely used to fuel much of the market advance on Thursday and Friday. If the S&P 500 continues strong-volume advances next week, and if the US M2 money supply shows more accelerated growth, we are very likely to change our subjective recommendation and urge our readers to invest in leveraged index funds that grow with US markets.  We are not quite there yet, but conditions are currently more favorable then they have been in the past 3 months.

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