For Friday January 24, 2014, We Recommend Investing in US Markets


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 dropped 0.89% on Thursday with volume above Wednesday and above the 30-day moving average, resulting in a classification of a strong-volume down-day for Thursday.  This strong-volume down-day is a little too far removed from the previous such days for a negative pattern to develop, but additional such days in the near future could form a predictive pattern.  The above-average volume continues.  If the S&P 500 were to decline about 6 points on Friday (-0.3%) our stop-loss algorithm could trigger a change in our automated market forecast to an uncertain trend.

Subjective Comments:

We are watching the market and our technical analysis closely.  Strong-volume down-days with large movement in the index is always concerning.  The volume up-trend continues, so a strong-volume day might or might not be a concern.  This is why it takes several such days in a short period to form a predictive pattern.  Additionally, Thursday’s drop could easily be continued volatility as the market moves sideways.  The drop Thursday does not appear to be a reason to panic.

We have analyzed the weekly US M2 (not seasonally adjusted) money supply and the biweekly banking reserve data.  Of mild concern is a drop in M2 from the prior week.  The residual control chart we use did not identify an out-of-control condition.  The magnitude of the M2 drop is not uncommon.  It looks like a typical drop of the 4-week sub-cycle with the exception that the timing is not correct for the sub-cycle decline.  This could be a shift in the sub-cycle timing at the beginning of the year, which would be consistent with the absence of the expected drop that did not happen two weeks ago.  For now this is not a reason to conclude a shift in the accelerated growth of the money supply.  Next week must be watched closely to see if the growth resumes, which would be consistent with the sub-cycle.  An additional drop next week would change our mild concern into a stronger worry.  As is the M2 growth rate is 8.9% annualized over the past 3 months.  This remains accelerated and strong growth.

The banking reserves suggest the money supply will continue to grow as a result of accelerated loan origination rates.  The required reserves continue to climb, and this means banks are originating new loans faster than old loans are maturing.  This causes the money supply to grow.  Regardless of the Fed’s tapering, or any additional tapering that could occur it appears banks are going to grow the money supply by lending aggressively.  Excess reserves also grew.  The drop two weeks ago appears to have been a year-end data glitch as excess reserves set another all-time high of $2.449 Trillion.  Although at a new high, the growth rate of excess reserves has slowed.  This is a combined result of Fed tapering and accelerated lending by banks.

Continue to invest aggressively for growth in US stocks.  We recommend leveraged index funds.  We also recommend price inflation hedges for that part of your portfolio you can leave invested for a long time.  If you should suddenly need funds you should plan to sell your equity positions before your price inflation hedges.  There is no telling how long the bubble-boom will go.  The current market weakness is most likely from spooked investors who are worried about the poor economic performance from the fourth quarter.  The leading economic indicators are ticking up, and this is consistent with the accelerated money supply growth.  If you want to learn more about how the growth rate of the money supply causes economic bubbles and the boom-bust business cycle, we recommend learning about Austrian Business Cycle Theory.  The best source of information to learn about ABCT and Austrian Economics is the Ludwig von Mises Institute.

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