For Monday August 12, 2013, We Recommend Against Investing


Investment Recommendations:

Ignore our automated market forecast and avoid US stock markets right now.  Continue to avoid all bond investments. Price inflation hedges remain good long-term investments, but only invest in price inflation hedges amounts that you can leave invested for a very long time.

 Technical Comments:

The S&P 500 declined 0.36% on Friday with volume below Thursday and below the 30 day moving average volume.  Friday was a light-volume down-day.  If the S&P 500 declines about 7 points on Monday (-0.4%) our market forecast could change to an uncertain trend.

Subjective Comments:

The Hindenburg Omen (technical indicator) appeared Monday, Wednesday,  Thursday and Friday this past week, continuing the clustering of technical indicators as is common when markets start to turn.  This week our pattern recognition software identified a pattern.  The pattern predicts a 50% chance of growth or decline in the S&P 500.  Given the US M2 money supply trends last year and year-to-day this year, Austrian Business Cycle Theory describes how and why the US economy and markets must crash.  We think this crash is coming soon.  We’ve previously written how the money supply growth in the past 20 months appears very similar to the historic crash in October 1929.  The money supply growth in 1928 was very similar to 2012 on a percentage basis, followed by near zero growth in the following year, just like now.  Marc Faber thinks the current market conditions are very similar to the market leading up to the crash in October of 1987.

Regarding US stock markets right now, we are in the calm before the storm.  Now is your opportunity to sell and get out of US markets.  Even though price inflation is high you will lose less wealth holding cash over the next several months than remaining in a long position in US equities.  If you have money in a 401k that does not have a cash or money market option, you’ll be disheartened to learn that bonds are a horrible investment as well and should be avoided at all costs.  If your 401k does not give you a cash option and you are stuck with bonds or stocks, there are a few options available.  You could take the maximum loan possible, which you’ll have to pay back, but you’ll be able to protect part of your wealth.  For example, if you borrow 50% of your 401k value and leave the other half invested in the S&P 500 index, you have half your wealth protected.  You can then take 25% of your 401k (half of the loan amount) and invest it in an inverse 2x leveraged index fund like RSW.  What this does relatively well is it places 25% of your 401k in RSW with 50% in the S&P 500 and 25% in cash.  If the S&P 500 goes up, the increase is offset by RSW.  If the S&P 500 goes down, that is also offset by RSW.  To keep perfectly hedged requires frequent rebalancing, which is a hassle and incurs transaction fees with your broker.  If you want to use this strategy, now is your opportunity to take the loan.  With the 25% of your 401k that remains in cash you can pay back almost half your loan over time.  As the crash gets closer you’ll have some cash to short US markets.  There are other options some employers offer, so be sure to research your circumstances.  If you have money in a 401k with an old employer, you can roll it into an IRA at your private broker and invest it anyway you wish.  So, another drastic step to protect your 401k would be to quit so you can roll it over to an IRA.

Sorry for the gloomy post, but you will feel much brighter by the end of this year when you have protected your wealth.  Let your family and friends know.  Time is short.

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