For Thursday May 09, 2013, We Recommend Against Investing


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 0.4% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  Wednesday was a strong-volume up-day, the second such day this week and it continues the growth pattern formation that’s been underway for the past two and a half weeks.  The record highs in the US markets do not impact our technical analysis at all.  A growth pattern develops based on the daily change in the index and the associated daily volumes.  Record index levels are irrelevant, although they can and do have a psychological impact on some investors.  If the S&P 500 declines around 51 points on Thursday (-3.1%) our stop loss algorithm could trigger a change in our automated forecast to an uncertain trend.

Subjective Comments:

We would love to see a strong-volume up-day with very strong volume, the kind of volume that has not been seen in months.  If the daily volume were to be twice the current daily average that would be a very significant volume compared to volume trends over the past many months.  This would be a technical indication that US markets are going to keep growing.  Our pattern recognition software has identified the formation of a growth pattern, but it is not yet fully formed.  A fully formed growth pattern did occur back on April 16th, just over 3 weeks ago.  The continuing concentration of strong-volume up-days since April 16th is making that fully formed pattern look more and more valid.

We wish the Federal Reserve was not printing money.  Money printing has been show for centuries to be bad policy.  It leads to bubble-booms and the crash-bust that follows, along with recessions and unemployment.  Unfortunately the Fed has been printing money for a hundred years and continues to do so.  Last week we noticed a change in bank lending which should result in an acceleration of the US M2 money supply growth rate.  This will drive price inflation higher and fuel a continuation of the current bubble-boom.  The current bubble must eventually go bust as explained by Austrian Business Cycle Theory.  If US M2 accelerates further then there will be an opportunity to invest while the bubble is still driving stock prices upward.  Be prepared to invest in leveraged index funds soon if the conditions we have been describing continue to persist.  Move your available cash for investments into your brokerage accounts.  Be prepared to invest in leveraged index funds that grow with US markets.  It’s necessary to take on the risk of leverage to grow your investments faster than price inflation erodes the purchasing power of your money.  That’s why we recommend leveraged investment instruments.  Please be sure you understand these investment tools and are aware of the risk.  If you are uncomfortable with the risk you can still invest in unleveraged index funds to take advantage of the nominal growth that will occur.

Just over 3 months ago the US M2 money supply dropped.  We discussed this when it happened and it’s the reason we advised moving to cash.  Since then the money supply growth rate has accelerated again and it appears we are exiting the danger of an imminent bubble burst.  However, the result of that drop in M2 has caused recent economic indicators to begin slowing.  Some of those indicators include the price of copper which is down nearly 20% year-to-date.  Copper has historically predicted changes in US stock prices, but that doesn’t mean it will continue to do so.  Many market commentators note such historic correlations and assume the correlations will continue to persist.  That assumption is fundamentally flawed when human decisions enter the picture.  Still, it is important to recognize many market participants make these flawed assumptions and might take action, resulting in changes in market directions.  Those actions will be overwhelmed by the available funds for investing as the money supply growth accelerates.  This is why understanding Austrian Economics and watching the money supply is so important for individual investors.  The next money supply data will be published tomorrow.  We are getting closer to changing our subjective investment recommendation.

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