For Friday May 10, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stock markets right now.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 declined 0.37% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  The decline was a light-volume down-day and does not change the prevailing patterns of daily market data that are more consistent with growth instead of decline.  This marks almost 3 consecutive weeks of such a strengthening pattern.   If the S&P were to decline about 42 points on Friday (-2.6%) our automated forecast could change to an uncertain trend.

Subjective Comments:

The weekly US M2 (not seasonally adjusted) money supply was published today and it contained a concerning surprise.  We have been moving in a bullish direction and have been telling our readers to prepare to invest in US markets.  The money supply data has suddenly shrunk again, and for this reason we will not recommend investing in US markets.

Last week we mentioned the sub-cycle often present in the US M2 (not seasonally adjusted) data.  This sub-cycle sees a dip every 4th week, and every quarter the dip happens for 2 weeks in a row.  The dip is a decline below the straight line growth trend, and when the quarterly dip occurs the decline is typically an unchanged M2 from the 1st to 2nd week.  Instead US M2 continued to decline for the week ending 4/29/13.  In the 2 weeks from 4/15 to 4/29 M2 declined $206 Billion Dollars.  This is very curious because US banking reserves published last week (biweekly publication frequency) showed a drop in excess reserves and a sharp increase in required reserves.  If the banking reserves data was correct, then US M2 should not be dropping.  The most concerning detail of our analysis of the M2 money supply was the results of the residual control chart we update weekly.  The drop on 4/29 fell below the lower control limit.  This is a very strong clue of a change in the straight-line growth trend which had been at 11.8% annualized over the past 3 months.  The out-of-control condition combined with the unexpected decline versus the typical pattern is enough to quench the bullish opinion we had been forming.  Until the US Banking Reserves and the Money Supply growth return to a consistent pattern it makes sense to wait and see what develops.

We will continue to watch the daily market data closely but are unlikely to change our subjective investment recommendation prior to next Thursday when the next update of the Money Supply and Banking Reserves will be available.  Continue to research price inflation hedges for part of your portfolio and remain vigilant in tracking the US money supply.  Our subjective position is now market neutral and could go bullish or bearish depending on what develops.

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