For Thursday December 19, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watch closely to see what trend develops.  Cash positions (including some currency outside of bank accounts) and price inflation hedges are still recommended.  There appears to be bullish trends developing in US banking reserves and the growth rate of the money supply.  We are becoming more bullish and could change our investment recommendation soon.

Technical Comments:

The S&P 500 advanced 1.66% Wednesday with volume above Tuesday and higher than the 30-day moving average.  Wednesday was another record high for the S&P 500 and a strong-volume up-day.  Strong-volume up-days are now accumulating although the recent frequency of strong-volume down-days is still present.  It is common to see both bullish and bearish strong-volume days at market turning points.  This is why several such days are needed to form a predictive pattern.  With the strong advance the S&P 500 is now about 32 points above our stop loss trigger.  A drop of 32 points on Thursday (-1.7%) could change our automated market forecast to an uncertain trend.

Subjective Comments:

US markets reacted to the Fed’s tapering announcement.  Markets were little changed until just after the 2:00PM (Eastern Time) announcement.  The strong advance following the announcement most likely means most market participants were expecting a bigger taper in the money printing rate.  Instead the taper was only a slowdown of $10 Billion per month.  EPJ reports the money printing starting in January 2014 will be $75 Billion per month, comprised of $35 Billion to purchase mortgage-backed securities and $40 Billion to purchase Treasury securities.  The next few days will show if this smaller-than-expected taper is the beginning of a sustained rally.  We think a sustained rally could occur, but not because of the amount of the taper.  Now that the taper occurred and is known, a source of market uncertainty has been removed.  That’s the immediate effect of the Fed’s announcement.  The more important factor is the growth rate of the money supply.  As we have been commenting for the past week, there is now pretty good evidence the US M2 money supply growth rate could accelerate.  It appears this is happening from more aggressive bank lending.  If this indeed happens we will recommend investing.  It also means price inflation will eventually accelerate as well.  Just in case you hadn’t noticed, prices are going up.  Don’t look at the propaganda of the Consumer Price Index.  Look at other data, such as the average price for a pound of ground chuck.  Just like the S&P 500, a pound of beef hit an all-time record high on Wednesday.

The strong advance on Wednesday is another data point that is moving our opinion in a bullish direction.

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