For Monday January 27, 2014, We Recommend Investing in US Markets

Investment Recommendations:

We still recommend investing in US stock markets, but we are watching closely to see if this recommendation should change.  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 a lot on Friday, declining 2.09% with volume above Thursday and higher than the 30-day moving average.  Friday was another strong-volume down-day.  This makes 3 strong-volume down-days in the past 5 trading sessions.  This is the beginning of a pattern that could predict a market decline if it completes its formation in the coming days.  However, it is not yet a predictive pattern.  Friday’s decline triggered our stop-loss algorithm and changed our automated market forecast to an uncertain trend.  If the S&P 500 were to advance about 20 points on Monday (+1.2%) our stop-loss trigger could reverse, changing our market forecast back to a growth trend.

Subjective Comments:

A 2%, one-day market drop absolutely caught our attention and is painful for leveraged long investments.  Volume on Friday was high as well, so our technical analysis that detects turning point patterns in the S&P 500 is something we are watching very closely.  We don’t have a predictive pattern yet, but one could form.  However, very recently a pattern that predicts market growth did fully form.  When markets are at turning points, including plateaus between periods of growth and decline, our analytical process detects the formation of both growth and decline patterns.  This happens because many participants think the market is about to go one way, and many participants hold the opposite view.  This plays out during market plateaus while those who want to get out sell, and those who want to get in, buy.  Once everyone is done achieving their new position, then the sideways plateau of the market ends and the new trend begins.  Adding to volatility are the emotions of investors who have just made a decision to change, and then the volatility can cause second guessing and more buying and selling.  We think this describes the US markets right now.

We have been and remain of the opinion that US markets will continue an up-trend after the current volatility subsides.  There will be downward pressure on the market from international financial and geopolitical events.  China is eventually going to experience an epic economic crash.  After years of massive money printing, much more than in the US since 2008, China is experiencing serious price inflation and is about to enter the crash phase of the business cycle.  Japan and England have been printing money too, but not on the same scale.  The Eurozone has not been expanding their money supply very much in the past several years, but they have been propping up concerns that should have been liquidated.  This is prolonging their depression, much as in the US during the 1930s.  There are geopolitical tensions between Japan and China as well as other locations.  All of these things could erupt and put downward pressure on US markets.

Regardless of everything that could happen, what has been happening for the past 3 months is accelerated growth of the US M2 money supply.  The growth rate of the money supply for most of 2013 was very slow following an average of 8% annual growth in 2012.  The slow growth for most of 2013 has put pressure on the bubble-boom of the US economy and market, and some of that pressure is creating volatility now.  Back in October 2013, 3 months ago, we thought US markets were very close to crashing.  Instead the M2 growth rate accelerated and has been growing near 9% annualized ever since.  If the current M2 growth rate should slow, we would become very concerned.  Following 9 months of slow growth we are not convinced the past 3 months of 9% growth will sustain a bubble for very long.  If M2 continues to grow around 9% or higher, then we see US markets resuming the bubble-boom trend.

Our stop-loss algorithm did trigger.  This increases our sensitivity to additional market drops and especially any more strong-volume down-days.  The M2 growth rate did dip recently, but dips are normal in the M2 data.  If more strong-volume down-days occur this coming week, and if M2 growth dips again this Thursday, we are likely to change our subjective investment recommendation.  We still think US markets are going to grow, but we are doing our best to remain objective and not be biased by our recent decision to invest for growth.  Less aggressive investors should consider carefully if they want to invest now or take a defensive position and move some of their portfolio to cash.  More aggressive investors should continue to hold their leveraged long positions.  Continue to hold and consider accumulating price inflation hedges.  If the US market does crash we expect the Fed to accelerate their money printing, and that will be very price inflationary on top of the accelerated lending by US banks.  Avoid all bonds.

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