For Thursday May 16, 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:

Wednesday was another all-time high for the S&P 500 which closed up 0.5% on volume above Tuesday and higher than the 30 day moving average volume.  Wednesday was a strong-volume up-day.  The market has been advancing for almost 4 weeks with strong volume and a complete absence of strong-volume down-days.  In the past 4 weeks the down days have been light volume.  The strong volume remains only slightly above average and nowhere near double the average volume.  If the S&P 500 were to decline about 61 points on Thursday (-3.7%) our automated forecast would likely change to an uncertain trend.

Subjective Comments:

The technical patterns of strong-volume up-days continue to be present in the daily market data, and this is very difficult to ignore.  Considering only our technical indicators it appears the market rally that is in progress will continue.  The only reason we’re hesitant to recommend investing is the drop in the US M2 money supply that was observed over the past two weeks combined with the M2 growth rate over the past 3 to 6 months.  Tomorrow will provide the next weekly M2 update and an update to the biweekly US banking reserves data.  We are curious to see if perhaps the recent M2 and banking reserve data has been an outlier and the prior trends have resumed, or if the money supply continues to contract.  While the daily market data has shown 4 weeks of strong-volume up-days, the strong volume has been just barely above average.  We have not seen very strong volume.  The absence of very strong volume very likely correlates with the M2 growth weakness, and this is why we remain reluctant to advise investing.

The New York Federal Reserve published their Empire Manufacturing index that surveys manufactures in New York State.  From the prior month the index fell 4 points to a -1.4 value, the first negative value since January.  Manufacturing is one part of the economy’s capital structure where interest rates and money printing have a larger and more immediate impact.  The index suggests this part of the economy is experiencing a slowdown in activity.  This is consistent with what Austrian Business Cycle Theory predicts as the growth rate of the money supply slows.  The change in this index is consistent with the drop in the money supply we identified about 3 months ago.  If the growth of the US money supply remains low, it will eventually allow the necessary economic and market crash to occur.  Make no mistake; a crash is absolutely going to happen because of the massive money printing and
expansion of the US money supply.  When the money supply grows it causes price inflation, distorts the economy and initiates the boom-bust business cycle.  There is no way to avoid the bust once the boom has begun, but the bust can be delayed by additional money printing.  Of course that only makes the bust worse when it finally occurs.

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