For Friday September 20, 2013, We Recommend Against Investing

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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 declined 0.18% on Thursday with volume below Wednesday but above the 30 day moving average volume.  Our pattern detection software considers Thursday to be a light-volume down-day, and as such does not contribute nor detract from the formation of predictive patterns.  If the S&P 500 were to decline about 67 points on Friday (-3.9%) our market forecast would likely change to an uncertain trend.

Subjective Comments:

Wednesday was a strong-volume up-day because the market was surprised to learn the Fed’s taper-talk for the past 2+ months was nothing but a lie.  If Wednesday and the past few weeks were a strong market rally, then strong-volume up-days would be occurring much more frequently with much higher volume.  The fact Thursday was a down-day shows the current rally is weak.  Volume was below Wednesday, but it was close to Wednesday and was above average.  Interpretation of the daily data suggests Thursday should be seen as a strong-volume down-day, and that is not supportive of a market that will continue to rally.  We think the current market rally is nearing its end.

The Federal Reserve published weekly US M2 (not seasonally adjusted) and bi-weekly banking reserve data on Thursday.  US M2 continues to grow slowly.  Over the last 19 weeks the straight-line growth of M2 has been 6.4% annualized.  Since the start of the year the annualized M2 growth has been 3.1%.  Both of these growth rates are below 2012 9.2% growth.  The 9.2% accelerated growth from last year is why US markets have been booming recently, but the weak growth means US markets are heading for a crash as explained by Austrian Business Cycle Theory.  Two weeks ago we noted a jump in the required banking reserves.  A jump in required reserves suggests lending is accelerating.  This data series is very noisy and the data published Thursday shows required reserves back down to where they had previously been.  This means US banks ARE NOT LENDING!  The maturation of existing loans is offsetting the new loans being created, resulting in a net of no new loans.  (Our interpretation of required reserves and bank loans is confirmed by this article.)  The money printing by the Fed is what is causing the M2 money supply to grow, and all of the $85 Billion per month of newly printed money is winding up as excess reserves in the banks.  This is the clear conclusion from the banking reserve data combined with the money supply data.

The US M2 money supply grows in two ways: Money Printing by the Fed and Fractional Reserve Lending by banks.  Bank lending is not growing the money supply.  Yesterday’s announcement by the money printers that they would continue printing at $85 Billion per month will not prevent a market crash as long as M2 growth remains where it is at.  We will continue to watch M2 every week and the banking reserves as well for any indication of a change in these trends.  We continue to predict a market crash prior to the end of this October.  The prediction of a crash is supported by economic logic.  The prediction of when is our best guess, and we want to emphasize we are guessing when we estimate the crash will happen by the end of October.  We have been expecting to see our pattern recognition software identify a pending crash, but so far that pattern has not appeared.  We will not recommend short investments based on a guess.  We will look for patterns in the daily market data before making an investment recommendation.  If our guess on when is wrong at least we will not be recommending investments without a basis from our technical analysis combined with the money supply trends.  At this point US M2 must accelerate very strongly and soon if a crash is to be delayed.  Note we did not say “if a crash is to be avoided.”  A crash must happen.  Rapid M2 growth could delay the crash, but M2 growth is not strong enough now.

Continue to avoid US markets and all bonds.  Price inflation hedges are good investments for part of your portfolio.  Price inflation makes holding cash unwise, but we recommend having cash available for shorting the market in the near future.  When the crash comes there will be an opportunity to invest in leveraged short funds and earn strong profits quickly.  Also, ignore what the Fed says.  They will deliberately mislead investors as part of their attempts to manipulate the economy and markets.  After 2 months of hinting at a taper the Fed did nothing of the sort.  This is why you must watch what they do in the Money Supply data and ignore what they say.

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