For Thursday, December 1, 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 shot up dramatically 4.3% Wednesday on volume much above Tuesday and also much greater than the 30-day moving average volume.  Our forecast remains for growth and now is very much above the stop-loss trigger in our algorithm.  To flip back to an uncertain forecast on Thursday would require a 6% drop of the S&P 500, which is about 75 points.

Subjective Comment:

We have been advising caution for the past two days because the increasing stock market was on light volume.  Today’s strong volume is a signal of strength.  Our forecast has been for growth for three days after continuing increases in the S&P 500.  Even with the high volatility these past 5 months it is unlikely our forecast will return to uncertain tomorrow or even this week.  We will continue to post in our technical comment the amount of decline needed to flip our forecast.

The clear cause for the sharp increase in European and US markets was the coordinated announcement of the US Federal Reserve, the European Central Bank (ECB), the Bank of Japan, the Swiss National Bank and the Bank of Canada (Canada’s central bank).  The initial reaction is to presume this is a signal that there will be a coordinated effort to stimulate the economy with liquidity, hence the sharp increase in stock markets as participants anticipate even further increases driven by such monetary policies.  There are two differing interpretations of this event, one bullish and one bearish.

Technical Explanation of the Agreement:

These central banks already had the Dollar Swap agreement in place. It was established back around October 15th.  The “swaps” are a lending mechanism of Dollars for other currencies at a specified price, or interest rate, expressed in basis points or “bps” for short.  This allows the Federal Reserve to provide other countries US Dollars to continue bailing out the European banks, and to keep Sovereign bond purchases going so the over-indebted countries avoid defaults.  The announcement Wednesday was simply that this existing lending program will continue at a reduced price.  The interest rate the Fed was charging was 100 bps above a market rate, and the announcement is starting on December 5th (this Monday) the price will be cut to 50 bps.

The Bullish Interpretation:

Some people expect the ECB to begin massive money printing, and the Fed to initiate QE-3 next quarter to the tune of about $500 billion dollars.  Robert Wenzel at EconomicPolicyJournal.com is predicting the ECB will announce initiation of their own massive money printing plan Friday next week (December 9th).  The swap line announced today, according to Tony Crescenzi at Pimco, means the Dollars sent to Europe will eventually wind up back in the US banking system.  He points out back in December 2008 the peak of such swaps was about $600 Billion Dollars.  This would be a huge QE level expansion of the US money supply, which would drive US markets higher.  For Europe, this is a signal that the ECB, with the assistance from the Fed and others, is beginning to provide more liquidity to address the debt crisis.

The key to the bullish interpretation is the assertion there will be more money printing in the future.  The announcement on Wednesday is seen as an additional clue of the massive money printing that will start soon.

The Bearish Interpretation:

Looking at a chart of European bond prices back on October 15th when this swap line was announced at 100 bps, there was a brief increase followed by a resumption of plummeting bond prices.  Cutting the price of these loans to 50 bps will by itself not do much.  The reaction of bond prices could likely be similar to what happened in October.  Things will improve briefly, but falling prices will soon resume.  The action in October only helped for about 6 weeks.  Many investors may instead interpret this coordinated central bank action as an indicator of how very difficult it is for European banks to obtain Dollars.  Indications continue to show interbank lending in Europe to be difficult as there is plenty of evidence European banks are close to collapse.

Our Thoughts:

We think the ECB, the Fed and other central banks will print money to bail out governments and banks.  The consequences of this will be a bubble-boom and strong price inflation.  Investing in leveraged index funds is a strategy for growing your investments faster than the rate of price inflation when this happens.  Such bubble-booms can last a long time depending on various factors, but eventually the bubble pops with a crash and a recession.  We don’t know when the central banks will begin printing.  We think they are indeed planning on printing, but we are unable to guess when the timing of when a few powerful bureaucrats may actually begin to do so.  Market participants are attempting to estimate when this will happen.  As more believe printing is imminent they will respond by entering the market and thus driving up stock prices.  Our automated forecast watches the daily market index and volume data to look for patterns that indicate what most of the investment money is doing.  Monday and Tuesday this week the market data did not show strong volume, but on Wednesday the large upward movement in the index happened with strong data.  This only happens when market participants actually invest, and that is what they did on Wednesday.

It is telling to note both the bullish and bearish interpretations of Wednesday’s central bank announcement both point to the need for additional central bank action.  The bulls see a signal that more money printing will happen.  The bears see today’s action as not sufficient to help for very long.  It comes down to guessing if more money printing will happen, and when.  We think it will.  We consider EconomicPolicyJournal.com a good source of information, and Mr. Wenzel has predicted Monday December 9th as the date of the next announcement.  You must decide for yourself if now is a good opportunity to invest or if you want to wait for the central banks to make a more declarative announcement of money printing.  If Mr. Wenzel is correct, then you could wait and see what the market does the rest of this week and next.  We will continue to post every day US markets are open.