For Tuesday, November 29, the market forecast is for growth

If you choose to invest now we recommend any leveraged ETF that grows with the US market, but please read our comments below before investing.

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 jumped up a large amount for a single day, closing at 1,192.55, up 2.9%.  While volume was above Friday, it was below the 30-day moving average.  This jump was sufficient to flip our automated forecast back to growth.  Should the S&P 500 drop about 19 points (1.6%) on Tuesday, our forecast would again trigger the stop-loss algorithm and flip back to uncertain.

Subjective Comment:

The light S&P 500 volume on Monday strongly mitigates any excitement regarding the upward movement in US markets.  Friday’s volume was light because of the holiday and shortened trading session, so comparing Monday’s volume to last Friday is not meaningful.  High volatility on both up-days and down-days can flip our automated forecast between growth and uncertain.  Monday’s large up-swing for now is only a bounce in a two-week down-trend that included 3 days of decline on relatively high volume.  Time will tell if this is a bounce in an on-going down-trend or a trend reversal.  Since this was such a large one-day swing on light volume, we recommend caution before jumping back into US equities and leveraged index funds.  Consider letting a few more days play out to see if this is a blip or a new trend.

What did NOT cause Monday’s bounce in US markets was retail sales from the prior weekend and Black Friday.  Does it make sense that US retail and on-line sales would lift European markets?  We don’t think so.  US markets were up strong on Monday (Dow +2.6%, Nasdaq +3.5%, S&P 500 +2.9%), but so where markets across Europe (London +2.9%, Germany +4.6%, France +5.5%, Swiss +2.4%, Sweden +4.0%, Austria +5.9%, Belgium +4.6%).  It is much more likely that European and US markets moved up for the same reason.  Black Friday can’t be the cause for both.

What does matter is the money supply in Europe and the US.  Austrian Business Cycle Theory explains how changes in the money supply growth rates will eventually impact the business cycle.  Economic and market booms are caused by money printing.  The money printing lowers interest rates, causing investments in businesses and projects that would not have otherwise been profitable.  As real resources are moved into these unsustainable ventures, the need for a recession to correct the misalignment grows.  The longer the money supply is expanded, the more the misallocations accumulate.  When the money growth slows, stops or reverses itself, the unavoidable bust and recession begins.

The European Central Bank (ECB) was printing Euros (M2) at a growth rate of 8% to 10% from October 2006 through October 2008.  From Oct 2008 through Oct 2009 the Euro M2 growth remained positive but declined from 8% down to 2%.  From Oct 2009 until about a year ago the growth rate was just below 2%, and for the past 12 months it has been just above 2%.  After such a long time of high growth, the ECB has held the Euro growth rate between 1.3% to 2.6% for the past 2 years.  Unless and until this growth rate increases significantly, the accumulated misallocations of resources and investments from the prior money-printing induced boom will continue to go bankrupt.  Government efforts to prevent the bankruptcies only prolong the recession.

Germany has remained opposed to ECB Euro printing, but it is unclear if they will continue to stick to this position.  Last week’s failed German bond auction could change Chancellor Merkel’s mind.  There is plenty of speculation Euro printing could begin any moment.  The unknown question is if the ECB has waited too long.  Massive Euro printing would ignite another bubble-boom in Europe and ease downward pressure spilling over to US markets, but by now it might be too late to prevent bank failures and defaults on Sovereign bonds.  A partial breakup of the Eurozone is a possibility. Until the uncertainty around Europe is resolved, we think downward pressure on US markets will remain.  Days where Europe bounces up allow US markets to increase too.  When Europe is down, US markets have been following.

The US money supply (M2, weekly data annualized) growth has been about 5.2% for the past year with the exception of mid-June and July this past summer when it jumped to around 32%!  This burst of summer lending has caused recent economic indicators and business performance (3rd quarter) to show improvement compared to the past 3 years of recession.  We thought this growth rate might persist and overcome the downward forces from Europe, but it turns out the resumption of about 5.2% M2 growth in the US has remained in place for the past 3 months.  The longer US M2 growth remains around 5%, the less likely the US economy and stock market will grow.  The summer burst came from bank lending, and the slowed growth has frustrated Fed officials.  US banks are probably holding their $1.5 Trillion of excess reserves as a cushion against their $1 Trillion of exposure to European debt.  In response, the Fed will likely begin another round of money printing (Quantitative Easing 3) next quarter by purchasing around another half-Trillion Dollars of mortgage backed securities.

Our best guess why the market shot up on Monday are expectations of money supply growth in Europe and the US.  However, the light volume indicates market participants are unwilling to go all-in with such a speculative position.  For small investors the best advice remains to wait and see, and this is what we recommend even though our automated forecast flipped back to growth.  Things will likely unfold rapidly in the near future, so be prepared to change directions quickly if money printing ramps up.

Comments are closed.