For Monday November 04, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US markets but watch closely to see what trend develops.  Cash positions (including currency) and price inflation hedges are still recommended.  Subjectively we hold a neutral opinion that has been turning bullish recently, but there is too much uncertainty in US markets right now to make an investment recommendation.

Technical Comments:

The S&P 500 advanced 0.29% on Friday with volume below Thursday but above the 30 day moving average.  Our system considers Friday a light-volume up-day even though volume was above average.  If the S&P 500 were to decline about 49 points on Monday (-2.8%) our stop loss algorithm could change our market forecast to an uncertain trend.

Subjective Comments:

The daily S&P 500 data this past week had two strong-volume up-days, a bullish indicator, followed by two strong-volume down-days, a bearish indicator.  The final day of the week was an up-day on above average volume.  This is a confusing pattern, but at market turning points this type of action is actually common.  It is likely we are at a market turning point.  US money supply growth has been weak for most of 2013, so US markets could be about to crash.  However US M2 growth has recently accelerated strongly, so a bubble-boom could resume.  For months we had been guessing US markets would crash by the end of October.  Early in October our automated forecast identified a pattern that predicted an imminent market decline.  By mid-October US markets had advanced a bit and our market forecast changed back to a growth trend.  Our prediction of a crash by the end of October was wrong.

Although we were wrong, our prediction was based on Austrian Business Cycle Theory (ABCT) and the growth rates of the US money supply.  We provided detailed explanation of our subjective prediction and consistently said an acceleration of the money supply growth rate could delay the crash, and this is what happened.  ABCT is correct economics and all that has happened, as ABCT explains, is that the bubble-boom that has been in progress for the past few years has been propped up for a while longer.  Eventually there will be a market crash.  Every bubble-boom caused by money printing (AKA Quantitative Easing) and fractional reserve lending must end in either a crash or what Ludwig von Mises called the “crackup boom” of hyperinflation.  It is impossible to know what will happen in the future, but we provide our best forecast based on the data available.  Look closely at the graph below.  It shows US M2 money supply for the past 3+ years.

US-MS-NSA-Growth-31OCT13

In the past half year there was 5 months of straight line money supply growth of 5.9% annualized.  For the first three weeks of October 2013 US M2 growth has accelerated as shown by the uptick at the far right of the graph (labeled “TBD”).  During October US banking excess reserves slowed in their growth rate at the same time M2 accelerated.  This strongly suggests banks accelerated fractional reserve lending.  The prior trend for excess reserves had been a steady growth as all the $85 Billion per month of Quantitative Easing had been swelling excess reserves to $2.3 Trillion Dollars.  This could be noise in the data, or it could indicate accelerated lending.

The more direct measure of bank lending is Required Reserves.  The Required Reserves are a very noisy data and it is not at all clear from that data if fractional reserve lending accelerated or not.  While banking reserve data is not showing a clear picture yet, M2 clearly did accelerate, but the timing of this most recent M2 acceleration needs to be carefully noted.  Look at the zigzag pattern during the early part of 2013.  In the month of January M2 declined sharply for 3 weeks then resumed growing.  In the month of April M2 dropped again sharply for 2 weeks before resumption of steady growth.  January and April are both the first months of fiscal quarters.  There was no zigzag in the month of July, but in October there has been acceleration for the most current 3 weeks, and October is the first month of a fiscal quarter.  If October is another zigzag, then M2 might be about to decelerate significantly.  If October is the beginning of a massive acceleration of fractional reserve lending, M2 could continue to grow at a much higher rate.

There is a 4-week sub-cycle in the US M2 (NSA) data that can be seen in the residual control charts below.  The charts below show the dip every 4 weeks, with 2 consecutive dips every quarter.  This is the 4-week sub-cycle.  The chart on the left shows the residual control chart with the 5.9% annualized growth extended through the end of October.  This shows the 3 right most weeks accelerating upward with the most recent point above the upper control limit.  The chart on the right shows the same thing with the new (TBD) growth rate used to calculate the residuals for the 3 right most weeks.  The chart on the right better shows the 4-week sub-cycle still in place even with the accelerated growth.

US-M2-NSA-Residuals-31OCT13

It is important to note the 4-week sub-cycle is due for the quarterly consecutive dip with the data to be published this coming Thursday.  If this happens, it could easily appear US M2 has decelerated from the new growth rate established during the past 3 weeks.  Unless the data published this Thursday is dramatically different than the most recent data value published last Thursday, it will be very difficult to interpret the new US M2 growth trend.  This coming Thursday will also not have banking reserve data published since that data is updated biweekly.  The potential zigzag pattern and the expected quarterly consecutive dip in the 4-week sub-cycle are both confounding events due this Thursday.  Unless the S&P 500 data shows a consistent picture in the coming week combined with an exceptionally obvious M2 change, we are going to wait until Thursday, November 14th before making a subjective call on what the new market trend might be.  If our automated forecast identifies a predictive pattern, we might make a call sooner.

Be patient and watch the next two weeks carefully.  US markets could go either way.  We have provided this detailed post with the various graphs to help explain why we think it prudent to wait two weeks before making a call on any developing trends in US markets.  Please keep checking with us every day and we will continue to provide insight into the facts that are influencing our subjective investment recommendation.