For Thursday, December 29, 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 Wednesday down 1.25% on volume above Tuesday but still far below the 30-day moving average volume.  If the S&P 500 drops by about 12 points (1%) on Thursday our forecast could switch to uncertain based on the stop-loss algorithm we use.

Subjective Comment:

Normally a market down-day on volume above the previous day is a sign of weakness.  However, the very light volume on Wednesday causes our system to reject the decline when considering the formation of a multiday pattern.  The very light market volume continues to be typical for the last week of the calendar year.

The debt crisis situation in Europe continues to be the primary focus of much discussion.  In the Wall Street Journal former Dallas Fed Vice President Gerald O’Driscoll Jr published an opinion article calling the Fed’s Dollar swaps with the European Central Bank (ECB) a bailout of European banks (Zero Hedge provides more details).  We mentioned yesterday the observation that much of the ECB’s new 3-year LTRO loan funding appears to have been deposited back into the ECB.  This appears more and more to be a symptom of European banks being unwilling to lend to one another, probably for fear other banks are near default.  Depositing funds borrowed at 1% with the ECB to earn 0.25% has to be a short-term strategy with the intent to have the money available for other uses, most likely purchasing sovereign debt at Treasury auctions from various Eurozone countries.  Today (12/28/11) there was a successful Italian bond auction, but only €1.7 Billion Euros of 24-month zero-coupon bonds were sold.  The ECB’s LTRO netted €210 Billion of new money into the banking system, so there remains a lot of money to buy more bonds.  The other relevant facts regarding the Italian bond auction was the stronger bid-to-cover ratio, the average yield of 4.85% (down from 7.8% a month ago), and the fact these bonds mature in 2 years.  These bonds will net 3.85% profit on top of the 1% cost from LTRO loans, and they will mature before the LTRO loans are due.  It will be interesting to see if bonds with maturities longer than the LTRO loans will do as well in upcoming auctions.  It certainly seems the European banks need a bailout.  The Fed Dollar Swaps were part of that bailout, and now the ECB’s 3-year 1% LTRO loans are the rest of it.

We encourage you to read this short post at Zero Hedge.  It covers the observations of European banks using the ECB to deposit funds.  Please look closely at their graph showing historic deposits with the ECB going back to January 2008.  Here is what we noticed:

  • Jan – Oct 2008: Almost no bank funds are deposited at the ECB
  • Starting in Oct 2008 when the US markets crashed and the current recession began, the Euros deposited by banks at the ECB shot up and fluctuated between €200 and €300 Billion.
  • During brief periods the amount declined from Feb – Jul 2009 and in December 2009
  • Starting in January 2010 deposits shot up and trended up, exceeding €350 Billion briefly.
  • Deposits declined in Mid-2010 and then further in January 2011.
  • From January through July 2011 the amount deposited at the ECB was typically below €50 Billion
  • Starting in July a new up-trend began and has continued through now with a new record of over €450 Billion of banking money deposited at the ECB

We have speculated US banks cut back their lending rate this past August out of their concerns the European banking system was in a crisis.  US banks have exposure to European debt and banks, so a banking crisis in Europe would motivate US banks to hold their cash reserves as a contingency instead of lending.  If the deposits of European banks at the ECB are assumed to indicate a fear of defaults and bankruptcies by banks in Europe, then consider the interesting observational correlations between US bank lending and European banking deposits at the ECB:

  • After 2+ years of high and variable deposits at the ECB, from January through July 2011 the deposits at the ECB declined and remained under €50 Billion
  • US banks have had averaged over $1.5 Trillion of excess reserves from April  through December 2011
  •  US banks engaged in rapid loan originations during the summer of 2011, resulting in about $470 Billion expansion of the M2 (seasonally adjusted) US money supply from 6/6/11 – 8/8/11.  Prior to this burst of summer lending, M2 had been growing at just over 5% annualized, and since has been growing at just over 4% annualized.

We think US banks, flush with reserves, are anxious to lend.  They have serious exposure to European debt.  Through the first half of 2011 US banks felt the debt crisis in Europe may have stabilized and starting in June began aggressive lending.  At the end of July and early August European banks again began rapidly increasing their deposits at the ECB.  This was probably interpreted by US banks as a sign of impending collapse.  As a result, US banks cut back their lending and continue to hold their excess reserves as a contingency against catastrophic losses in Europe.

These are the issues that cause us to remain very cautious regarding US equity markets.  The debt crisis in Europe will eventually have to be resolved by massive defaults and bankruptcies.  We do not know if this will happen sooner or later.  US banks appear to be just as uncertain and are holding their reserves as a contingency.  US stock markets are likely going to continue to bounce about without a sustained up nor down trend until it becomes clear what will happen next.  The solid data we are looking at includes the S&P 500 daily market data as processed by our forecasting algorithms, and the money supply data provided by central banks.  The ECB balance sheet is indeed expanding, but this is not translating into an increase in the Euro money supply growth rates.  Until Euro growth rates accelerate, the ECB is effectively sterilizing the impact of their loans and asset purchases.  We continue to advise caution with your investment portfolio.  When US markets advance on higher volume along with rapidly expanding money supplies in the US and Eurozone, that will be the time to start investing heavily.