For Wednesday February 12, 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:

The S&P 500 advanced 1.06% on Tuesday with volume above Monday and higher than the 30-day moving average, resulting in a strong-volume up-day.  The large upward movement in the index combined with strong volume is normally the type of action seen during market rallies, but there have not been enough such days to produce a predictive pattern.  In fact the recent market history has been a frequent occurrence of strong-volume down-days.  It will take many more strong-volume up-days to overcome the recent negative data.  The advance in the index puts the market further above our stop-loss algorithm trigger.  The S&P 500 would have to decline about 56 points (-3%) on Wednesday to trigger the algorithm and change our automated forecast to an uncertain trend.

Subjective Comments:

It appears the new Fed Head, Janet Yellen, and her congressional testimony created a favorable reaction by market participants on Tuesday.  The S&P 500 has had its best 4-day run in 13 months.  The market seems to think the Fed under Yellen will continue to print money like crazy.  For the record, we think any Quantitative Easing (money printing) is nuts, but we understand it’s a racket and makes a very few very wealthy, so it’s likely to continue.  Just don’t ever buy the propaganda that money printing is good for the economy.  From our technical analysis and our analysis of the growth rate of the US money supply, it is not clear which way US markets will go from here.  We recommend against investing in US stocks until a direction becomes more obvious.  Continue to hold and accumulate price inflation hedges, especially since Fed Head Yellen appears to be a money printing Keynesian zealot.  For the same reason, avoid all bonds.  When price inflation accelerates, and it will, bond yields will have to go up make bonds attractive to buyers, and this means current bond prices will have to fall.  Holding bonds until maturity will ensure repayment of principal and interest, but the rate of return will lag behind the rate of inflation.  This is why we recommend against all bonds.

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