For Friday June 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 dropped 2.5% on Thursday with volume above Wednesday and higher than the 30 day moving average.  Thursday was a second consecutive strong-volume down-day.  Our pattern detection software has not identified a prediction of further market decline, but there is an absence of patterns that suggest US markets will grow.  The market drop Thursday was sufficient to trigger our stop loss trigger and change our market forecast to an uncertain trend.  The S&P 500 would have to advance about 16 points (+1%) on Friday to change our forecast back to a growth trend.

Subjective Comments:

Our automated market forecast is likely to change back and forth between growth and an uncertain trend if US markets exhibit up-down action day to day.  The technical patterns are more consistent with a market decline than growth, so please ignore our automated forecast and stay out of the US stock market right now.  If our software detects a pattern predictive of a market decline, we will advise our readers to consider taking short positions in US markets, but that has not happened yet.

The Federal Reserve published the weekly update for the US M2 (not seasonally adjusted) money supply.  Over the past 6 weeks the US M2 growth has been 8.4% annualized as determined by a straight-line curve fit.  6 weeks is not very long to evaluate the money supply growth.  The average growth rate since the beginning of the year (6 months) is less than 2%, and that follows a 14% annualized growth rate at the end of last year.  The 2% over the past 6 months is not sufficient to sustain the bubble-boom created by the prior growth rate as described by Austrian Business Cycle Theory (ABCT).  The odds of a crash continue to increase.  ABCT explains why the current situation must lead to a crash, but estimating the time of the crash subjectively is very difficult.  This is why we use our forecasting process of pattern detection software, but our software is not perfect.  Our software identifies turning points, so it does not provide much advance notice when a change pattern appears.  The best guess we have is either this July (next month) or October for a market crash.  We’re predicting the crash in these months because they are the months following quarter points.

In addition to our opinions and technical analysis, the Hindenburg Omen appeared again in the US market.  This is a technical pattern that has historically preceded market declines.  ABCT also explains that when the market crashes, the crash starts in capital goods sectors before consumer goods sectors.  Another indication this is happening are the serious decline in sales for Caterpillar North American.  The recent announcement by the Fed about what they think is an improving economy (they are wrong) has led most market participants to conclude the Fed’s money printing will slow in the near future.  This is the most likely reason US markets have declined in the past 2 days, but the decline is also happening because the money supply growth rate has collapsed from 14% to 2%, as we have been reporting for weeks.  There are also international events that could cause concern and influence markets downward.  European markets have been declining and are highly likely to do so.  The Chinese economy is crashing and there might have been a bank failure in China.  There have also been major protests in Brazil, although it has not yet received significant media coverage in the US.  There are plenty of other international issues that could flare up, and anything at this point could be a trigger for further market declines since the money supply growth has collapsed over the past 6 months.

Continue to avoid US markets right now, and avoid bond markets for the indefinite future.  Price inflation hedges have taken a hit recently, and this is why we’ve been saying to hold those positions for a very long time.  Price inflation remains a serious concern from the prior and on-going money printing.

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