For Thursday October 17, 2013, We Recommend Holding Short Positions and Not Adding New Investments to Your Portfolio


Investment Recommendations:

Our automated forecast has changed to a growth trend, but we are recommending against investing for growth at this time.  If you have a short position, consider holding it.  If you have a cash position, stay in cash.  Circumstances are highly unpredictable right now.

Technical Comments:

The S&P 500 advanced 1.38% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  Wednesday was a strong-volume up-day and caused our automated forecast to return to a growth trend.  This pattern predicting growth officially cancels our prior pattern predicting a decline.  For the next few days our stop loss algorithm will be establishing a new baseline, so a strong market decline right now will not change our forecast.  Should another pattern predictive of a market decline appear our automated forecast could change to decline.

Subjective Comments:

If you just read our technical comments you’re probably wondering exactly what all those tidbits of information mean.  Simply stated, the current market patterns are confusing.  Our technical analysis software looks for patterns that predict growth or decline.  There was a pattern identified back on 10/3 that predicts a market decline, and that pattern has not officially been terminated by our software.  However, our software today identified a growth pattern.  This set of circumstances has happened a very few number of times in the 60+ years of historic data.  This small amount of history provides little evidence to base an investment decision upon.  What has happened historically is another predictive pattern is usually identified within a few weeks.  Sometimes that pattern has been another growth signal, and other times it has been a decline signal.  We standardized our software to go with the most recent pattern when this set of circumstances occurs.  This is why our official forecast is now a growth signal.  We’re providing this detail to help you make your own decision regarding your investments.  Before making your final decision, please continue to read.

What our pattern recognition software does not consider is the money supply growth rate interpretation via Austrian Business Cycle Theory (ABCT.)  It is worth repeating from our recent posts that US M2 money supply growth is currently slower than 2012.  ABCT explains why a strong growth rate followed by a slowing growth rate in the money supply will cause the boom-bust cycle in the stock market and the economy in general.  We have had the boom based on the 9.3% growth in 2012, so the slower money growth now must result in a crash.  We still think this crash is coming soon.  If US M2 growth should accelerate above 9.3% the crash could be delayed.  If US M2 growth accelerates more than 10% to 15% then not only could the crash be delayed, but another mini-boom could occur.  The Federal Reserve’s money printing over the past several years has resulted in over $2 Trillion Dollars of excess reserves in US banks.  If US banks accelerate fractional reserve lending then the US M2 money supply could see accelerated growth.  So far there is no evidence this is occurring, but about 2 weeks ago the biweekly banking reserve data showed an up-tick in required reserves.  Tomorrow another data point in this series will be published along with updated M2 data, but this data will not be published until after US markets close.  If the up-tick two weeks ago was noise or a new trend will be clearer tomorrow.  Based on money supply and ABCT we still think a crash is coming.

The market advance on Wednesday triggered the change in our automated forecast, so we want to consider why did the market go up so strongly on Wednesday?  As we mentioned recently, we have been expecting an advance in US markets once a political solution to the US Government shutdown / debt ceiling crisis was produced.  It was announced a deal was in the works and progress on passing the deal continued through the close of US markets, so it seems clear the stock market went up in reaction to the political actions in Washington D.C.  Wednesday was a strong-volume up-day with a strong index advance, but the “strong volume” was only 5% higher than Tuesday and 8% higher than the 30 day average.  This is not incredibly strong volume.  What will be very telling is which direction the market goes on Thursday, and how strong or weak Thursday’s market volume will be.

Here are two anecdotal items of financial news, both supportive of a negative market outlook:

  • IBM announced a very large miss on expected revenue and dropped 15% in afterhours trading on Wednesday (this is a 2-year low for the stock and will heavily influence the Dow downward on Thursday)
  •  Chase Bank has announced a ban on wire transfers that send money from the USA to other countries starting on November 17th.  This was influenced by “encouragement” from the Consumer Financial Protection Bureau (CFPB).  The CFPB has made the same “encouragement” to all banks, so this ban could extend to other banks.  This is a type of capital control designed to prevent US Dollars from leaving the country.

The crash of IBM stock and the quite announcement of capital controls are both significant signals of economic problems.

When we consider everything discussed above we are inclined to wait until Thursday’s market data, US M2 money supply data and the biweekly banking data are published before making a change to our subjective investment recommendation.  For this reason we suggest the following:

  1. Do not invest for growth in US markets despite what our automated forecast says.
  2. If you can tolerate the risk and have already invested in a short position, hold that short position at least through tomorrow.  Consider a stop loss order if you’re nervous.  Do not add to short positions.  Be advised our subjective forecast could change tomorrow.
  3. If you have not invested in a short position, stay in cash.  Our subjective forecast could change tomorrow.

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