For Tuesday January 28, 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 again on Monday, declining 0.49% on above-average volume but below Friday’s volume.  This makes Monday a light-volume down-day.  The recent strong-volume down-days have still set up a potential for a negative pattern to form, but additional strong-volume down-days will be needed for that to happen.  The S&P 500 remains below the stop-loss setting which leaves our automated forecast at an uncertain trend.  The S&P 500 advances about 21 points (+1.2%) on Tuesday for our forecast to return to a growth trend.

Subjective Comments:

Our technical forecast sometimes triggers the stop-loss algorithm and then quickly reverses.  With a half percent decline following a 2% decline Friday last week, the market is not starting well this week for growth investments.  The occasional false trigger on our stop-loss is quickly reversed within a day or two.  With Monday’s decline the odds are reduced that we will see our market forecast quickly return to growth.  Volume was above average, but it has been above average for weeks as there is a clear up-trend in volume.  The volume below last Friday is somewhat encouraging when looking for reasons to conclude the market should be growing, but it is not good to be looking for rationalizations to justify previous decisions.  Objective analysis is necessary for successful investing.  Our recommendations are not intended for day trading or trading with holding periods measured in days or weeks.  Our system and associated recommendations are intended to invest for months at a time, but we remain cautious and on the watch for evidence we should change our opinion.

The major reason we remain bullish is the accelerated growth of the US money supply.  Austrian Business Cycle Theory (ABCT) explains that when the money supply growth accelerates a bubble-boom is created.  Additionally, the money supply must continue to grow at an ever accelerating rate to sustain the bubble-boom.  The increasing rate of growth must be enough to generate nominal profits in excess of forecasts and expectations.  Conversely ABCT explains that if growth does not continue to accelerate but instead remains constant or if the growth rate slows, then the bubble-boom will end.  There is a time lag between cause and effect that is difficult to predict as there are too many factors influencing the decisions of investors and business leaders.

Below is an updated graph of the US M2 (not seasonally adjusted) money supply with our straight-line curve-fits with annualized growth rates.  The dotted lines show the average growth rates since May 2012:

  • May 2012 – Dec 2013 Average Annualized growth was 10% and it accelerated during this period
  • Jan 2013 – Sep 2013 Average Annualized growth was 2.3% with sideways zigzag growth
  • Oct 2013 – Current Average Annualized growth has been 11% but seems to be trending towards 9%

US-M2-NSA-Growth-23JAN2014

According to ABCT after accelerated growth of 10% the slower growth of 2.3% put the US markets and economy under pressure and increased the risk the bubble-boom would end.  As October approached we were writing about our concerns of a pending crash and in early October our automated forecast detected a predictive pattern suggesting a market decline was about to occur.  In mid-October the M2 growth rate accelerated suddenly and is now growing faster, somewhere around 9 to 11%.  This growth arrested what we thought was a pending crash and allowed US markets to continue growing.

Now that we are in the latter part of January the Q4 business results are becoming known.  After 9 months of 2.3% decelerated growth compared to a prior growth of 10%, it does not surprise us that US businesses were starting to see poor results.  We speculate the current market weakness is a result of international market turmoil combined with recent poor performance of US firms.  Investors are concerned and some are starting to exit the market and take profits.  At the same time underlying this period of market volatility the US M2 growth has accelerated for the past 13 weeks.  The Fed tapered the rate of money printing from $85 Billion per month down to $75 Billion and there is speculation further taper could be announced this week.  However, US banks have accelerated their lending as demonstrated by an increase in the required reserves.  The money supply growth is accelerating because banks have accelerated their lending.  The current volatility will pass and US market growth will resume as long as the money supply growth remains accelerated.  If we see a downward break in the money supply growth, that will cause us to change our opinion about the market.  The next weekly M2 data will be published Thursday.

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