For Monday, December 12, 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 closed up 1.7% on Friday with volume below Thursday and lighter than the 30-day moving average volume.  For the week the S&P 500 was up just under 1%.  On Monday the S&P 500 would have to close down about 23 points (1.9%) to change our forecast from growth to uncertain.

Subjective Comment:

The strong movement up in the market was on light volume.  The light volume is the key piece of data that tells us most market participants remain uncertain what will happen next, despite the large up-day in the index.  For the past several months volume has been light and the market highly volatile.  Concerns about the European debt crisis persist which put downward pressure on US markets.  The lending burst by US banks this past summer added close to a half trillion dollars to the M2 money supply, which in turn put upward pressure on US markets.  These two forces have combined to create the volatility.

News from the European summit was mixed.  Great Brittan refused to join a new agreement, so an agreement was made without the UK.  European Central Bank President Mario Draghi praised the agreement but did not announce additional ECB support of countries with too much sovereign debt.  The absence of a united political agreement and additional actions from the ECB has caused market participants to reevaluate Thursday’s ECB policy announcement.  The headline from Thursday was the interest rate cut by the ECB down to 1%, which was widely expected.  The additional details from the ECB on Thursday included a reduction in bank’s reserve ratio that frees up more than €200 Billion Euros.  Additionally, the ECB will now accept lower quality assets as collateral which will allow European banks to access more ECB loans.  These moves are intended to prevent a liquidity freeze in the banking system.  Some speculate this could be the mechanism by which provide funding that allows banks to in turn prop-up over indebted countries.  For more details, see this post at EconomicPolicyJournal.com.

The ECB has been buying just enough bonds to prevent a collapse but not enough to reignite a bubble-boom in the Eurozone.  For months ECB purchases have been sterilized, meaning the purchases have been offset by the sale of other assets.  Simply put, the ECB has not been printing money to buy sovereign bonds.  The reduction in the reserve requirement for European banks will likely not cause the Euro money supply to grow as some of the banks are near collapse and need cash on hand.  The €200 Billion Euros “freed up” by cutting the reserve requirements will likely remain in the banks as excess reserves.  The ECB acceptance of lower quality collateral for loans will also likely not spur money supply growth via bank lending and the fractional reserve money multiplier.  If we’re wrong and these ECB actions do cause the Euro M2 supply to grow, it will be a few weeks before the ECB balance sheet and money supply statistics reflect any change.  We think most market participants understand this situation and have discounted Thursday’s action by the ECB as anything but the minimum necessary to avoid a bank collapse in the near term.  Without additional ECB support, we do not see a bubble-boom resuming anytime soon.

Absent any dramatic announcement from the ECB, we will continue to watch the S&P 500 daily market data for clues what will happen next.  Caution is advised as long as volatility remains high and volume low.  We suggest waiting until the market closes on Monday to see what happens before changing your investment portfolio.  Our automated forecast is susceptible to high volatility.  We hope our commentary is useful and welcome your feedback.

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