For Thursday, Nov 17, the market forecast is for growth

We recommend any leveraged ETF that grows with the US market.

Here are some options:

2x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QLD

UWM

SSO

3x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

TQQQ

URTY

UPRO

Technical Comment:

The S&P 500 dropped 1.7% on Wednesday on volume higher than Tuesday but below the 30-day moving average volume.  This large drop was not quite enough to trigger the stop-loss algorithm within our automated stock market forecast.  Another decline on Thursday of about 5 points on the S&P 500 (0.4%) would likely be enough to trigger the stop-loss safety net and switch our forecast to uncertain.

Subjective Comment:

We have been very bullish in our commentary for many weeks now.  The basis for our bullish stance is the expanding US money supply and the bubble-boom it will cause.  While this has been trying to push US markets up, we have said again and again that the Eurozone debt crisis is pulling US markets down.  This confluence is resulting in high levels of volatility and growth has not been consistent.  The past 3 weeks have seen low volume on the S&P 500 with a price plateau.  When we combine this recent pause in the market growth with the US M2 money supply growth rate slowing to where it was prior to the most recent burst of bank lending, we’re wondering what might be going on?

One possibility is that US banks need their $1.5 Trillion in excesses reserves in case they suffer losses from European sovereign defaults and write-downs.  Recently Representative Ron Paul estimated US banks have over $1 Trillion of exposure to European debt.  Defaults in Europe are becoming more and more likely.  Greek debt was recently written down by 50%, which is a 50% default.  Citi Chief Economist Willem Buiter is concerned defaults could happen soon on Italian or Spanish debt.  Austrian Business Cycle Theory explains how the boom-bust cycle happens.  Europe had a period of inflation of their money supply (Euros), and now the European Central Bank (ECB) is not growing its balance sheet.  This is the root cause of the boom, and after every bubble-boom a bust is necessary.  A bust can sometimes be delayed by more money printing, but the ECB so far has not done this.  The ECB is buying bonds of the countries having debt troubles, but not in a significant way.  There was speculation the ECB might turn on the printing presses with the new ECB President.  There were some initial indications from the ECB this might happen, but so far the ECB balance sheet is not showing a return to monetary expansion.  Perhaps the politicians and bureaucrats in Europe are not letting the crisis go to waste?  Maybe they’re dragging this out to further consolidate the centralization of power in the EU?

Something else very interesting happened on Wednesday.  The US Federal Reserve raised the margin requirements for Primary Dealers.  This means PDs must keep about $2 Billion more cash on deposit in order to participate in purchasing bonds directly from the US Treasury.  This was an unexpected change in one of the Fed’s policies.  MF Global recently went bankrupt, and MF Global was a Primary Dealer.  The Fed’s margin hike could be in response to the MF Global bankruptcy.  By increasing the margin requirement, the Fed is implicitly signaling they think there is risk other Primary Dealers could go bankrupt.  Several European banks (BNP, Barclays, Credit Swiss, Deutche Bank, UBS) are Primary Dealers.  As we have said before, European banks own a lot of European Sovereign debt.  If Italy or Spain (or both) start defaulting on their bonds, which is very likely if the ECB does not start printing a lot of money soon, those banks are at risk of going under.  US banks are not lending to European banks and have been moving to reduce their exposure, and now the Fed made a margin hike in case Primary Dealers (which includes European Banks) go bankrupt.  All of a sudden Citi Chief Economist’s concern about Spanish and Italian bond defaults seems a lot more credible.

European bond defaults and bank bankruptcies are likely to cause large declines in US markets.  The volatility and drops likely from such an event would most likely trigger our stop-loss safety settings and flip our forecast to uncertain.  If this eats into the US banking system excess reserves, all of a sudden US bank lending could slow further.  This would mean the US bubble-boom we have been expecting will be a short blip.  The likely response by the Fed would be QE3, although they may call it anything else to avoid becoming a focus of political attention.

Clearly, we are connecting a lot of dots to formulate a highly speculative opinion.  Trying to figure out what will happen to US markets in this manner is challenging and fraught with human error.  This is why we rely on our forecasting model.  Of course it is not perfect, but it is much better than nothing and not influenced by subjective opinions and the emotions resulting from wild swings in portfolio values.  We advise checking our sight every day.  We will continue to post our forecast and the technical likelihood of the stop-loss algorithm flipping too-frequently from the high volatility.  Mild declines in this environment that are just enough to trigger our stop-loss safety settings are sometimes best ignored for one day as potential false signals.  That was the case with the two most recent uncertain forecasts.  A large decline that strongly triggers the stop-loss should be considered more carefully as a real signal.  The speculation we have provided here is context that would make us heed a large drop should that occur on Thursday.