For Tuesday January 14, 2014, We Recommend Investing in US Markets

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Investment Recommendations:

It is time to invest in US stock markets.  Price inflation hedges should be held for the long term and remain a good idea as we expect price inflation to accelerate in 2014.  Avoid all bonds.

Technical Comments:

The S&P 500 declined 1.26% on Monday with volume above Friday and higher than the 30-day moving average, making Monday another strong-volume down-day.  There have been 4 strong-volume down-days in the past 8 trading sessions, but a predictive pattern has not formed.  However, a predictive pattern is clearly under development and could fully form should strong-volume down-days continue to accumulate.  Monday’s index decline was almost enough to trigger our stop-loss algorithm.  However, a subroutine that attempts to prevent spurious triggers of the stop-loss algorithm was invoked and reset the trigger point.  If the S&P 500 declines another 12 to 13 points on Tuesday (-0.7%) we expect our automated forecast to change to an uncertain trend.

Subjective Comments:

Monday’s decline was the largest one-day decline in over 4 months.  It appears traders did not like Dennis Lockhart’s comments very much as Monday’s declined happened just after he spoke.  Lockhart is the Atlanta Fed Head and Fed watchers concern themselves with the propaganda from members of the FOMC.  It appears his generally up-beat comments about the US economy spooked investors.  The twisted logic is that good economic news will mean the Fed will slow or stop printing money, and the simple conclusion is this will be bad for stocks.  The more important thing to note is what happens to the money supply.  Certainty the money printing by the Fed impacts the money supply, but that is not the only way the money supply is inflated.  Fractional Reserve Lending also grows the money supply, and it appears banks have accelerated lending.  Banks could overwhelm any slowing of the Fed’s printing presses.  Seasonally adjusted money supply numbers declined last week, but the non-seasonally adjusted money supply numbers continue to grow.  The “adjustments” by the Fed should be ignored and non-seasonally adjusted numbers used when looking at the money supply growth rates.  By itself, Monday’s market decline does not change our opinion about US markets and the current bubble-boom.

Monday was another strong-volume down-day, and that does have our attention.  Continued strong-volume down-days must be carefully considered and could influence our subjective opinion.  We will be watching the money supply updates very carefully this week and next week.  We’ve seen growth in required reserves, and this indicates banks are accelerating fractional reserve lending.  This will drive money supply growth, but it’s not clear if this will dominate or be offset by other influences on the money supply.  We also noted the apparent absence of the 4-week sub-cycle in the not-seasonally adjusted M2 money supply, which under the present circumstances strongly implies the money supply growth rate is accelerating.  It is not time to change investing for market growth, but the next few days could change our opinion.

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