For Friday March 14, 2014, We Recommend Against Equity Investing

Hold_Recommendation

Investment Recommendations:

Sell US equity positions and hold cash, but be prepared to move investment funds back into US markets.  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 bond scheme from the Feds.  Ignore the propaganda.

Technical Comments:

The S&P 500 dropped 1.17% on Thursday with volume above Wednesday and higher than the 30-day moving average, resulting in the second strong-volume down-day in the past three trading sessions.  This type of daily action suggests market weakness, but so far a predictive pattern has not formed.  Thursday’s decline was sufficient to trigger our stop-loss algorithm and change our automated market forecast to an uncertain trend.  The S&P 500 would have to advance about 19 points on Friday (+1.0%) to reverse the trigger and change our forecast back to a growth trend.

Subjective Comments:

In the past two weeks we have said we have been turning bullish but not enough to recommend investing.  We’re glad we have been cautious to avoid Thursday’s decline, but we are still becoming more bullish although not enough to recommend investing.  It appears the first three weeks of January were indeed a drop in the US money supply, but it seems to have been a mild dip and only three weeks long.  Since 1/27/14 the money supply has resumed growing at near the same accelerated rate seen from mid-October to the end of December last year.  Since the start of the year the money supply is currently little changed, but this is because of the zigzag down and back up over the past two months.  There are two ways to look at the money supply growth rates right now:

  • Essentially 0% since the start of the year which follows accelerated 10%+ growth since last October
  • A 3-week drop at an annualized rate of -24% at the start of January that interrupted a double-digit growth rate that started last October and continues through the most current data available

Both statements are technically accurate.  What is not clear is if the money supply growth will continue to be accelerated, or if it will slow.  Our concern is if it slows.  The short 8 week zigzag in the money supply did not take long to cause the stock bubble to hiccup.  There are also multiple economic indicators being published that suggest the first quarter of 2014 will be weak.  Such a quick response to a slowing money supply growth rate means the bubble is close to collapse.

Watch what the Federal Reserve does with money printing, and how US banks react with lending.  These are the two mechanisms by which the US money supply grows.  If weak economic data and an unstable geopolitical situation occur, what will happen to the money supply?  There are likely emotional reactions by investors, but will the Fed taper more, or will they reaccelerate the printing press?  Will banks freak out and slow or stop lending, or will they accelerate new loan originations?  We don’t know.  Watch the money supply and be ready to invest accordingly.  In the meantime maintain and/or accumulate price inflation hedges, and continue to avoid all bonds.

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