For Wednesday January 29, 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 advanced 0.61% Tuesday with volume above the 30-day average but below Monday’s volume.  Our pattern detection software classified Tuesday a light-volume up-day.  The above-average volume trend continues.  If the S&P 500 advances about 9 points on Wednesday (+0.5%) our stop loss trigger will likely reverse and our automated forecast would return to a growth trend.

Subjective Comments:

The occurrence of strong-volume down-days has been continuing lately, but they have been spread out just enough that a predictive pattern has not formed.  Tuesday, as a light-volume up-day, interrupts the pattern formation but does not entirely destroy it.  The S&P 500 index did advance more on Tuesday than it declined on Monday, both in absolute terms as well as percent change.  When combined with above-average volume this creates the beginning of a growth pattern.  Neither a growth pattern nor a bearish pattern is fully developed, but both are forming.  This formation of both positive and negative patterns at the same time is common when markets are at turning points.  This could mean the bull market is coming to an end and is about to turn down, or it could mean we are at a sideways plateau from which growth will resume.  In the past few weeks we have seen in our technical analysis many partial formations of negative patterns and one fully formed pattern that predicts growth.

The accelerated growth of the US money supply combined with the fully formed predictive growth pattern a few weeks ago is why remain bullish and think US markets will continue upward after this current period of sideways volatility.  It is important to remember that there is a time lag between changes in the money supply accelerations and decelerations and a response by the market.  The time lag is not predictable using Austrian Business Cycle Theory (ABCT), so that’s why we have our technical analysis to help predict the timing.  ABCT explains why the cause and effect of money growth acceleration and bubble-boom exists.  As long as the money growth remains accelerated we are confident the bubble-boom will resume.  The current weakness in US markets is from the weak growth during the first 9 months of 2013 combined with some overlapping influences from world markets.

There could be additional volatility resulting from the State of the Union address, more from the FOMC meeting announcement as well as international events.  All of this affects the short term, but the accelerated and strong money supply growth will drive another bubble-boom as described by ABCT.  In addition to driving asset bubble-booms, the growth in the money supply will eventually accelerate price inflation.  The price inflation will in turn put downward pressure on bonds.  For this reason we strongly recommend avoiding all bond investments and having part of your portfolio in price inflation hedges.

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