For Tuesday May 21, 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 0.1% on Monday with volume below Friday and lighter than the 30 day moving average.  Monday was a light-volume down-day.  The S&P 500 is beginning its 5th consecutive week with no strong-volume down-days combined with occasional strong-volume up-days.  Monday continues this pattern because volume was light.  Very strong volume remains absent.  If the S&P 500 were to decline about 58 points on Tuesday (-3.5%) our stop loss algorithm would likely trigger and change our automated forecast to an uncertain trend.

Subjective Comments:

Last week we commented about a recent trend for the DOW index to advance on Tuesdays.  There is no way to predict if this pattern will continue, but if enough traders think it will happen and act accordingly, their actions will cause the market to advance.  Regardless of this Tuesday pattern what matters is the Austrian Business Cycle Theory (ABCT) and hence the growth rate of the US money supply.  ABCT predicts that the end of a bubble-boom will see the bust (recession / depression) initiate in the capital goods sector since those businesses are more sensitive to interest rates and the availability of new loans.  We have been commenting for weeks about US banking reserves and the strong inference that US banks are not originating new loans in excess of the rate of maturing loans.  As such we should see evidence of economic weakness developing in capital goods, and indeed this is the case.  Caterpillar’s North American sales have fallen 18% year-over-year.  Given the recent daily market data and continuing market rally, it will probably be a little while before US markets begin to decline.  Even so, our interpretation of the money supply and economic data suggests, as ABCT predicts, a market decline is approaching.  This is why we continue to recommend against investing in the US stock market right now.

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