For Monday February 10, 2014, We Recommend Against Equity Investing


Investment Recommendations:

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:

On Friday the S&P 500 advanced 1.33% on volume below Thursday but above the 30-day moving average, making Friday a light-volume up-day.  Above average volume continues as it has since early January.  The advance in the S&P 500 has interrupted the development of patterns that predict market decline, but the recent accumulation of strong-volume down-days has also created circumstances that historically have rarely been favorable to market growth.  If the S&P 500 were to decline about 38 points on Monday (-2.1%) our stop-loss algorithm would likely trigger and change our automated forecast to an uncertain trend.

Subjective Comments:

Thursday and Friday saw steep advances in the S&P 500 index, but both were on relatively weak volume compared to the market drops the prior week.  This type of action, strong-volume down-days and light-volume up-days, is more consistent with a market that will decline.  We stress there is not a predictive pattern that points to decline, so we are recommending avoiding the market for now.  Investing for growth or taking a short position right now is a gamble because it is unclear which way markets are headed.  There has been some accelerated money supply growth which does create a bubble-boom.  Large economies like the US can sustain bubble momentum for a bit after the money supply growth slows, which it has over the past 3 weeks.  The current bubble-boom in the US is weak after the money growth trend in 2013, so the current momentum sustainability is likely short lived.  The recent change in the US M2 money supply growth rate is troubling.  If it turns out to be a short term change with a quick return to accelerated growth, US markets will likely resume a bubble-boom.  If the money supply growth rate continues to stagnate or even decline, then we will see a crash.  Do not listen to what the Fed says it is going to do, but instead watch the money supply and react to what is actually happening.

Banks have enough excess reserves to accelerate lending if they choose, and the recent increase in the required reserves implies they might be doing just that.  However, the decline in the money supply is not consistent with the growth in required reserves.  We looked at the past 2 years of required reserves and noticed that they increased in January 2012, January 2013 and again in January 2014.  The current jump in required reserves could be a seasonal behavior of depositors and not a change in lending.  Continue to watch and wait to get a clear direction of what will happen.  In the meantime avoid all bonds and consider price inflation hedges for part of your investment portfolio.  We are subjectively recommending ignoring our automated forecast for now.

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