For Monday February 03, 2014, We Recommend Against Equity Investing

Hold_Recommendation

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 dropped 0.65% Friday with volume above Thursday and higher than the 30-day moving average, creating another strong-volume down-day.  The month of January had 9 strong-volume down-days compared to only 3 strong-volume up-days.  The fully developed patterns predicting growth occurred on above-average volume.  The 50-50 pattern that puts equal odds on market growth or decline occurred because of the 9 strong-volume down-days and has to be given more weight than the growth patterns.  In the past 2 weeks there have been 4 strong-volume down-days and only 1 strong-volume up-day, further pointing to market weakness right now.  Day-to-day index volatility is flipping our automated forecast between a growth trend and an uncertain trend because our stop-loss trigger is near the current S&P 500 index value.  Friday’s decline was enough to again trigger our stop-loss algorithm and change our automated market forecast to an uncertain trend.  If the S&P 500 advances about 10 points on Monday (+0.6%) our forecast could flip back to a growth trend.

Subjective Comments:

The recent drop in the market combined with our technical analysis (above) point to uncertainty.  The US money supply has been showing accelerated growth since this past October, but now it is not clear if banks will continue lending aggressively in order to sustain the money supply growth rate.  International markets are experiencing weakness and there is general investor concern about that and the Fed’s “tapering”.  If bank lending departments also become fearful about current economic prospects, they could indeed slow their lending.  We are not sure if this has happened because the banking reserve data is published every other week and tends to be noisy.  We are speculating, but if we are correct then the recent accelerated money supply growth rates will not have been enough to sustain a bubble-boom for much longer.  It must be remembered that for the first 9 months of 2013 the money supply growth rates collapsed compared to 2012.  The size of the US economy allowed the 2012 money growth to maintain momentum, and the Fed’s $1 Trillion per year of money printing provided support to the bond market and general investor sentiment.  Money printing and lending has slowed, but it has not stopped.  The slower rate is setting up a crash while still putting upward pressure on prices.  Price inflation will continue to be a problem, and this could begin to put a further drag on economic and stock performance.  For all these reasons we have change to a more cautious position in our subjective recommendation.  Avoid US markets right now.  Avoid all bonds and consider putting part of your portfolio into price inflation hedges.

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