For Friday, December 23, 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 trading Thursday up 0.8% with volume above Wednesday but still below the 30-day moving average volume.  The 3-day up trend puts the S&P 500 about 35 points (2.8%) above the stop-loss trigger of our automated forecasting algorithm.  Should the market decline on Friday, it would have to drop this much to switch our forecast back to uncertain.

Subjective Comment:

Market volume remains very light which is typical for the end of the year.  Thanks to the US tax code, there can be some end-of-year selling for tax purposes.  This is more likely during calendar years like 2011, where there is a major correction mid-year.  This could put some downward pressure on the market for the next few days, and if volume remains light volatility could pick up.  The 3-day up trend on the S&P 500 has been large for the movement in the index, but volume has been light.  The market data had been developing a pattern of weakness, but that pattern is subsiding.  Overall, the daily S&P 500 data does not show signs of serious strength.  It still appears most market participants are waiting to see what the market will do and are not currently engaged in buying and selling.

The Federal Reserve published the weekly money supply statistics, including revisions to the banking system reserves.  This data continues to show the same mild growth from August 8th through December 12th.  This makes 18 weeks since the burst of summer lending that caused M2 (seasonally adjusted) to grow by $470 Billion Dollars from early June through July.  The M2 non-seasonally adjusted numbers show the same trends.  The summer burst fueled the beginning of an economic boom that is has recently shown up in various economic indicators and news articles.  It is not at all clear the burst will continue to fuel growth.  The longer the M2 growth rate remains at the much lower rate 4.2% (SA) to 6.4% (NSA), the more likely the summer burst will fade, followed by another down-turn in the US economy and stock market.  The banking system required reserves shows a very similar story with no evidence US banks have resumed lending.

The European Central Bank’s 3-year LTRO continues to be discussed in the financial blogs, and the opinions continue to be categorized in opposing views.  Some articles are skeptical regarding the ability of the LTRO to fix the Eurozone debt crisis while others see it as a backdoor bailout capable of delaying bankruptcies a while longer by massive Euro printing.  Our position on the ECB 3-year LTRO is that it could well become a backdoor bailout capable of igniting a bubble-boom in the Eurozone, but for that to happen the ECB must monetize (print money) the LTRO funding instead of sterilizing.  We haven’t performed the analysis of the ECB balance sheet to estimate how many assets the ECB has remaining to continue sterilization operations.  It is logically true the ECB must eventually run out of assets for sterilization.  That may happen, or the new ECB President Mario Draghi could change policy and begin printing Euros.  Regardless of the differing opinions of the various articles written on the LTRO, all the authors agree more has to be done by the ECB if bankruptcies are to be delayed further into the future.  The only options for the ECB are to print Euros or not, and if they print, they can decide how fast to print.  So far the ECB policy has been to print slowly, just enough to avoid a collapse but not fast enough to reignite a bubble-boom.

All of this comes down to a choice regarding investing in US equity markets right now.  If you are aggressive and believe the ECB will ramp up money printing, then you can invest now.  There will likely be volatility in the near term until it becomes obvious the ECB has changed its monetary policy.  If you’re right and the ECB prints rapidly, the markets in the US will begin to rally, followed by a stronger rally as US banks resume rapid lending.  If you want to avoid the near-term volatility and wait to be sure the ECB is printing, then continue to hold a cash or risk-off position.  If you miss some of the initial market rally, you’ll be able to quickly jump in between signs Euro printing has ramped up and when US banks resume rapid lending.  All of this money printing by the ECB and the Fed is not sustainable.  Eventually the bubble will burst, and there will be serious price inflation.  This is why we recommend leveraged index funds.  The leveraged funds allow your investments to grow faster than inflation, and to also grow sufficiently that you will still have a positive return after capital gain taxes.

Comments are closed.