For Friday November 08, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US markets and watch closely to see what trend develops.  Cash positions (including currency) and price inflation hedges are still recommended.  There is too much uncertainty in US markets right now to make an investment recommendation, but things are turning bearish again after having been bullish for most of October.

Technical Comments:

The S&P 500 declined 1.32% on Thursday with volume above Wednesday and higher than the 30 day moving average.  Thursday was the 4th strong-volume down-day in the past 7 trading sessions, and volume was the strongest it has been in the past 7 weeks.  A pattern that predicts a market decline has begun to take shape but is not yet fully formed.  Just over a month ago our system identified a fully formed market decline pattern that turned out to be a false signal.  However, when market decline patterns occur it is not unusual for another to form within a few months.  If the S&P 500 were to decline about 33 points on Friday (-1.9%) the stop loss algorithm would likely change our market forecast to an uncertain trend.  Additional strong-volume down-days in the near future could complete a market decline pattern and change our market forecast to a decline trend.

Subjective Comments:

Thursday was a very interesting day for US markets.  Initial Public Offerings (IPOs) have been having a very good year, and this is typically a bullish indicator for markets.  Thursday saw Twitter’s IPO with spectacular gains, all of which were erased by the end of the day.  This is not the best data to watch, but it is interesting and telling.  The biggest financial headline came from the Eurozone where the European Central Bank (ECB) stunned markets by cutting their interest rates.  The consensus opinion was there would be no change in the ECB’s rates, so this caused immediate reactions in many markets.  The mechanism by which the ECB will cut rates is by accelerating the printing of Euros.  By the end of the day US market indices were down quite a bit and volumes were very strong.

The continued rapid accumulation of strong-volume down-days continues to grab our attention.  A week ago we said we would watch for two weeks before creating a subjective investment recommendation.  We were reacting to the accelerated US money supply growth and the strong-volume up-days that had been happening.  What a difference a week makes.  In addition to the daily market data, the Federal Reserve published the weekly US M2 (not seasonally adjusted) money supply data.  Last week we described the 4-week sub-cycle in the US M2 (nsa) data.  Every 4th week there is a dip in the growth pattern of the money supply with 2 consecutive dips once per quarter.  Today data was published for the week ending 10/28/13 and the consecutive quarterly dip presented itself again.  The dip was very strong given the 25% annualized M2 growth that was occurring in October, but not strong enough to draw any conclusions about the ongoing growth rate of the US money supply.  As we explained last week, it will take another M2 data point to evaluate the current growth trend.  The daily market data and the large dip in M2 strongly support the hypothesis that the M2 acceleration in October was a zigzag to be followed by a slower M2 growth rate moving into the end of the year.  If strong-volume down-days continue to accumulate and M2 does not bounce back next week, this will be our conclusion.  If this develops, it would indicate US markets are likely to crash soon.  Do not invest in US markets right now.  Allow another week of data to present itself before taking action regarding US stocks.  Price inflation hedges and cash remain our recommendation right now.

We watch the US money supply growth rates because this is the best way to subjectively estimate what the markets and economy will do in response to the massive money printing by central banks and fractional reserve lending by commercial banks.  Austrian Business Cycle Theory (ABCT) explains how the boom-bust cycle occurs.  ABCT is a rich and detailed explanation of how accelerated growth rates in the money supply cause the boom, always followed by a bust when growth rates slow or in rare cases, runaway hyperinflation.  There is a lot written on the subject and we encourage our readers to learn more.  Here is a short video by Tom Woods on ABCT.  ABCT requires understanding Austrian Capital Theory as well, and here is a great article by Robert Murphy on Capital Theory.  Here is another article on ABCT.  The Ludwig von Mises Institute offers an incredible amount of material on Austrian Economics.  We encourage you to learn as much as you can.  The Austrian Economists have the correct methodologies and present proper economic theory and reasoning.  As such, the Austrians make Economics interesting.  If you’ve been exposed to economics before and felt confused, that’s because there are a lot of confused and incorrect economic theories taught around the world.  Ignore all of it except for the Austrians.  Here’s a link to the Mises website.  Enjoy!

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