For Wednesday September 11, 2013, We Recommend Against Investing


Investment Recommendations:

No Change: 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 advanced 0.73% on Tuesday with volume above Monday and above the 30 day moving average, making Tuesday a strong-volume up-day.  This marks the third strong-volume up-day identified by our pattern detection software in the past six trading sessions.  This is not yet sufficient to create a fully formed predictive pattern, but the rapid accumulation of strong-volume up-days is a trend that must be watched carefully to see if it persists.  If the S&P 500 declines about 47 points on Wednesday (-2.8%) our market forecast could change to an uncertain trend.

Subjective Comments:

For many weeks we have been providing the opinion that US markets will crash before the end of this October.  With US markets still 4% down from the peek a few weeks ago and with other factors to consider, we can make a case supporting our continued opinion of a nearing market crash.  We recognize subjective opinions result in a natural human bias to resist change.  The very recent market data shows some signs of a potential market rally, but it is entirely too early to reverse course and think the crash we have been predicting has been delayed.  We will watch the data closely for continued indications of a change in the trend.  We have tried to be exceptionally clear that our estimate of the timing of the coming crash is what we are guessing about.  The economic fact a crash is coming is not a guess but based on the change in the money supply growth rate and the boom-bust results that follow as explained by Austrian Business Cycle Theory.

Here are reasons we still think US markets will crash in the near future.  There have been more layoffs in the home mortgage industry as interest rates continue to climb.  Interest rates are going up because the money supply growth rate has slowed and remained very small compared to the growth last year.  As US M2 continues its slow growth we have also seen excess reserve grow in tandem with the printing of new money from the Fed’s QE program.  Required banking reserves have remained flat which indicates banks are lending only as fast as old loans are maturing.  The two sources of money supply growth are the money printing by the Fed and fractional reserve lending.  This all supports the conclusion that money supply is not growing fast.  While this could change at the whim of US banks, it is not clear if and when this might happen.

Historically September is bad for US markets as consumer spending increases and pulls money away from the capital sectors of the economy, including the stock market.  With the annual September pressure on stocks combined with the weak money supply growth, conditions are ripe for a crash.  The possible US military action against Syria has captured headlines, but the coming political crisis that could really spook US markets is the end of the Federal fiscal year and the debt ceiling.  Congress must pass legislation to continue funding the US government by the end of September.  This is happening at the same time the US Treasury is about to run out of funds from the extraordinary measures being used because of the debt ceiling.  Estimates are that without Congressional action the Treasury will run out of cash between October 18th and November 5th.

We remain firm in our opinion that investments in any bonds and investments in the US stock market right now are not wise.  We see bonds continuing to decline in price into the indefinite future.  As for US stocks, we expect a crash soon, but there are some signs the crash might be delayed.  Long or short investments in US stocks are very much a gamble right now.  When a fully formed pattern develops we will make an investment recommendation based on our technical analysis and the US money supply growth rates.

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