For Thursday May 30, 2013, We Recommend Against Investing


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 gave up all of Tuesday’s advance and a little more by dropping 0.7% on Wednesday with volume above Tuesday and higher than the 30-day moving average.  Tuesday was classified by our pattern recognition software as a strong-volume down-day.  For the second consecutive week there have now been strong-volume down-days on the S&P 500.  That is not enough to predict an immediate downturn, but it is something to keep track of.  If the S&P 500 declines around 21 points on Thursday (-1.3%) our automated market forecast is likely to change to an uncertain trend.

Subjective Comments:

The strong-volume up-day on Tuesday was with below average volume.  Wednesday the S&P 500 gave up Tuesday’s entire advance with a strong-volume down-day where the volume was above average. pointed out that this past Tuesday was the 20th consecutive Tuesday with a market gain (Dow Jones).  They also pointed out that “since January 25th, the Dow is up an impressive 11% but absent Tuesdays [it] is merely unchanged at +0.2%.”  This pattern appears to be intact, although it by no means will remain intact as a reliable trading strategy.  Still, there are traders who use such patterns which can have a self-fulfilling effect.  We do not recommend trading this pattern.

We remain concerned about the slowed growth in the US M2 money supply and as such will not recommend investing in US markets.  Some of our readers might be concerned about recent declines in price-inflation hedges.  We remain convinced the proper price-inflation hedge is a wise investment if held for a long time.  Do not invest in price-inflation hedges for short-term gain.  Even if price-inflation seems mild now, it will get worse as a result of the massive amounts of money the Fed has already printed.  There are $1.7 Trillion Dollars of excess reserves in US banks, and when banks start lending these reserves it will accelerate price inflation.  Here is a very good opinion article that explains some of the recent dynamics in the gold market.  You can also track price inflation at monthly, or at MIT’s Billion prices Project daily.  If you choose to allocate some of your portfolio to price-inflation hedges, limit the amount to that which you can hold for at least a year or longer.

Bond prices have started to decline.  We don’t know if this is the beginning of a large decline in US bond prices or not, but as prices drop yields and interest rates will rise.  Avoid bonds because of the price drop potential, and watch bond prices closely.  If they continue to drop we could see US Banks begin to pull excess reserves to invest in higher interest rate opportunities.  That will be highly price inflationary.  Should US banks lend fast enough it is possible US M2 could accelerate so much as to create another bubble-boom in the economy and stock market.  The current bubble-boom appears to be ending.  If it pops with a dramatic crash in asset prices it will be much harder for an accelerated M2 growth rate to keep the current bubble going.  Avoid bonds and avoid US markets.  Hold cash and have some price-inflation hedges in your portfolio.

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