For Thursday October 31, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watching closely to see if an up-trend develops before investing.  Cash positions (including currency) and price inflation hedges are recommended right now.  Our subjective opinion remains unchanged, but we’re moving away from our prior bearish position on US markets and now hold a neutral opinion that is becoming more bullish based on recent market data.

Technical Comments:

The S&P 500 declined 0.49% on Wednesday with volume above Tuesday and above the 30 day moving average.  After two strong-volume up-days, Wednesday was a strong-volume down-day.  If the S&P 500 declines about 52 points on Thursday (-2.9%) our stop loss algorithm would likely change our market forecast to an uncertain trend.

Subjective Comments:

We have been watching the data this week carefully for confirmation a new bubble-boom is starting.  The strong-volume down-day on Wednesday is not the type of daily market action consistent with a bull market.  It appears enough market traders were expecting the Fed to accelerate the money printing, but the FOMC announcement indicated no change to the current $85 Billion per month of Quantitative Easing.  Shortly after the announcement US markets dropped and stayed down through the close of the day.  It is possible this is a one-day dip in a developing new uptrend.  Fed watchers predict higher odds for accelerated money printing in December and January.  What almost everyone is missing is that what matters is the entire money supply, not just the money printing by the Fed.  M2 is the broadest measure of the entire US money supply published by the Fed.  The $85 Billion per month does have a small direct impact and an indirect secondary impact on M2.  The main driver of M2 growth right now is fractional reserve lending by US banks, and those banks have well over $2 Trillion of excess reserves they can lend.  Tomorrow US M2 weekly data and biweekly banking reserve data will be published and we will be able to see if the past two weeks are a statistical blip or if M2 is really starting to accelerate.  We could change our investment recommendation tomorrow, or we might wait until this weekend depending on the S&P 500 data from Thursday.  A single strong-volume down-day can be ignored within a rapid accumulation of strong-volume up-days, but we’ll be more cautious if two strong-volume down-days were to suddenly occur back-to-back.

Happy Halloween!

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