For Monday, December 5, the market forecast is for growth

If you choose to invest now 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 was up most of the day Friday but closed down a tiny 0.02% on volume higher than Thursday but below the 30-day moving average volume.  On Monday if the S&P 500 drops about 53 points (4.4%) the stop-loss trigger in our automated forecast could cause a flip to an uncertain forecast.

Subjective Comment:

With a hat tip to EconomicPolicyJournal.com, Gary North provides the following summary of the reason the six central banks announced on Nov 30 the coordinated action to reduce the cost for Dollar Swap loans.  He explains the six central banks took

action preliminary to (1) Angela Merkel’s December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic.

There are an unknown number of credit default swaps that are like insurance policies against sovereign defaults.  If Italy defaults, those CDS contracts would have to pay out, and this is likely why US banks are holding on to their $1.4 Trillion of excess reserves instead of making loans.  The domino payouts of the CDS contracts would be part of the “financial panic” Mr. North is referring too.  If you like pictures, the NY Times has a good visual of the Euro Crisis.

US banks increased lending this past summer.  During June and July the US M2 (seasonally adjusted) money supply grew about $57 Billion per week, adding $416 Billion in just 7 weeks.  Prior to this lending burst, and ever since the beginning of August, M2 has grown at $8 to $9 Billion per week.  The burst in lending caused an up-tick in the US economy as predicted by Austrian Business Cycle Theory.  The slowing of the growth occurred when US banks realized they needed their excess reserves as a contingency against the European crisis.  The slower M2 growth jeopardizes the bubble-boom in the US that is desired by the Federal Reserve, US banks and politicians anxious to claim success during reelection campaigns.  The burst in the M2 growth rate also tried to push US markets higher while at the same time the European debt crisis put downward pressure on US stocks.  This is why markets have been exceptionally volatile, both up and down, for the past 5 months.

If you look at the NY Times graphic, you see Greek debt was relatively small compared to Italy.  The near defaults in Greece captured the headlines, but Greece was never the problem.  Italian and Spanish debt is what will bankrupt European banks if those countries default on their bonds.  Now that Italy is quickly becoming the problem as evident by the increasing yields of their bonds, the Eurozone crisis has reached the tipping point as Mr. North has described.  The sensible thing to do is accept the failure of those countries and banks involved in this debt crisis and write most of it off.  This is painful but necessary, and eventually these defaults are going to happen.  The insane thing to do is to print money to fund the purchase of Italian bonds in order to temporarily defer Italy’s eventual sovereign default.  European leaders except Germany want the ECB to print Euros and bailout Italy.  Germany remembers the Weimar hyperinflation and has been insisting the EU treaties do not allow ECB printing in this situation.  The dithering appears to be nearing an end.  Either the ECB prints massive amounts of Euros or the Eurozone breaks apart in some fashion and a debt crisis contagion quickly develops.

US officials appear to be getting very involved in order to overcome Germany’s objections so the ECB will print.  The Federal Reserve has been frustrated with the slow bank lending since August, leading to speculation QE3 could be launched to purchase US mortgages.  The Fed probably pushed to lower the price of Dollar Swap loans to give Europe a little more time.  Next week US Treasury Secretary Tim Geithner will travel to Europe ahead of the summit on the 9th.  He will meet with various officials, most likely to put pressure on all parties to get an agreement in place to print money.  There has even been speculation that the US and EU orchestrated last week’s failed German bond auction to put more pressure on Germany to relent and allow printing.

There certainly seems to be a lot of evidence that political pressure is being put on Germany to allow the ECB to print Euros.  Investing now is a bet massive Euro printing will happen.  The actions taken so far are not enough to prevent sovereign defaults and debt contagion from the Eurozone crisis.  Anticipation of printing appears to have moved US and European markets higher this week.  The S&P 500 market data has not formed clear patterns that predict continued growth.  The triggering of the stop-loss algorithm is concerning.  The large up-days this past week were in response to central bank actions and expectations of what European politicians and bureaucrats most likely will do.  If the ECB prints, markets will move up and rally for a while, probably weeks or a few months.  Failure to print will cause strong downward movement in the near term that would likely be halted in the US by Fed intervention, but not before a lot of investments lose a lot of value.  China will crash, probably soon.  A Chinese stock market collapse would cause fear and continued volatility.  The Chinese crash will happen regardless of what the ECB does, but the timing is uncertain.

If you choose to invest now, we advise against going all-in.  We are still waiting to see the S&P 500 market data show strength.  Up-days in the index are not strength unless they happen on high volume.  Of the two large up-days this past week, only one was on strong volume.  Patterns that predict future market movement require several days to develop, so right now the direction of the market is not clear from the data.  We have provided here the analysis we think is the root cause for current market conditions.  As Friday next week (Dec 9) approaches, it is possible market data could show a more clear signal.  Waiting to see what happens after next week is a reasonable strategy for the short term.  If you can tolerate more risk, consider investing a portion on Monday well ahead of announcements from the European summit next week.

3 Responses to For Monday, December 5, the market forecast is for growth

  1. TSP LLC says:

    As a follow up to our comment about the coming crash in China, here is an article from the Wall Street Journal that describes the situation in China and includes a mention of Austrian Business Cycle Theory.

    http://online.wsj.com/article/SB10001424052970203833104577071901186892744.html

  2. Pingback: For Tuesday, December 6, the market forecast is for growth « Development Site

  3. Pingback: For Tuesday, December 6, the market forecast is for growth « Thirteen Star Publishing LLC