For Friday January 31, 2014, We Recommend Against Equity Investing


Investment Recommendations:

We are changed our subjective recommendation.  Sell US equity positions and hold cash.  Price inflation hedges should be held or accumulated for the long term as price inflation is starting to accelerate.  Avoid all bonds, including the new MyRA bonds announced recently.

Technical Comments:

The S&P 500 advanced almost 20 points (+1.13%) on Thursday with volume below Wednesday but above the 30-day moving average, making Thursday a light-volume up-day.  The above-average volume trend continues.  Additionally, our pattern detection software identified a growth pattern.  The advance was just enough to reverse our stop-loss trigger and return our market forecast to a growth trend.  If the S&P 500 should decline Friday by about 0.3 points, not percentage, but 0.3 points, our forecast would very likely return to an uncertain trend.

Subjective Comments:

Today was ironic.  We changed our investment recommendation to risk-off yesterday and today the market advanced over 1%.  Even more ironic is our automated forecast just barely returned to a growth forecast and a growth pattern was detected, yet we will remain firm on our advice to stay out of the market right now.  We have analyzed the growth rate of the money supply, and it has slowed to 7.8% annualized over the past 3 months.  Last week it was near 9% and the week before it was well above 9%.  For the first 9 months of 2013 the US M2 (not seasonally adjusted) money supply grew at an annualized 3% rate.  During the 4th quarter growth accelerated to a rate in the double digits if the entire month of October is included.  This slow growth rate followed by an accelerated growth can result in a bubble-boom, but only if the accelerated growth rate remains strong.  2012 experienced an annualized average 8% growth, so the 3% growth for the first 9 months of 2013 has put the US bubble at risk of popping.  We though the market was about to crash in October but M2 growth accelerated and the bubble was propped up a while longer.  We had been recommending investing for growth having watched M2 grow at an accelerated pace during Q4 last year, and now we see evidence M2 growth is slowing.  The M2 growth has only been for a few months following 9 months of slow growth.  The economy and market were weakened by the slow growth in 2013 and the current bubble will not last for long if the money growth rate declines again.  This appears to be happening.

We track the money supply growth using a residual control chart to identify changes in the straight-line growth rate.  We did not see an out-of-control residual with the money supply data published today, but it was close.  The dips in growth are not following the common 4-week sub-cycle, so something has changed.  Banking reserves are published every other week, so we don’t have an update for that data series.  The last update suggested required reserves were growing which points to accelerated bank lending.  This is a signal that suggests M2 should further accelerate but instead M2 is decelerating in its growth rate.  While required reserves are suggesting M2 growth should be accelerating, the fact remains it is not.  When we couple the M2 deceleration with the 50-50 pattern detected by our automated technical analysis yesterday, we are confident taking a pause and moving to a risk-off position is the correct decision for the near term.  Things could change quickly, and in either direction.  We think it is better to wait and see instead of making a guess.  Our signals all point to an uncertain near-term future, so risk-off is our subjective recommendation for US stocks.  The growth pattern detected today is more recent than yesterday’s 50-50 pattern, but the above-average volume trend appears to be confusing our growth pattern detection algorithm.  In our judgment the 50-50 pattern is likely more reliable than the new growth pattern.

Price inflation hedges remain a very good long-term investment, and all bonds should be avoided for the indefinite future.  Ignore the propaganda that will be coming about how great the new MyRAs will be.  Bonds are loans to the government, and the US government is FLAT BROKE!  The debit and obligations to pay future benefits is a staggering present value sum.  The US government will either default on their bonds, including MyRAs, or the Fed will print so much money that bonds will have negative real interest rates after price inflation.  The “taper” which slows the Fed’s printing press must either stop and the government defaults or the printing press will accelerate and drive up price inflation.  Either way bonds will lose real value.  Avoid all bonds.  Oh, and the US government is about to go through the political drama again in late February over the debt ceiling.

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