For Wednesday, January 4, 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 started 2012 off with a big up-day, moving up 1.6%.  Volume was above Friday and just 7% above the 30-day moving average volume.  The S&P 500 would have to decline about 25 points on Tuesday (2.2%) to trigger the stop-loss algorithm and change our forecast to uncertain.

Subjective Comment:

The large up-day in US market indices was on higher volume, but not volume levels of serious strength.  Since July of 1950 the S&P 500 has moved up 1.55% or greater on a single day 668 times.  The median volume percentage on such days is 10% above the 30-day moving average volume.  For the increase in the index, volume was typical by historical standards.

Our advice is to be ready to invest very quickly when and if data begins to indicate a significant improvement.  We caution against investing now, although you must decide for yourself.  It is not clear if US markets will begin a bull run or continue to stagnate.  The slow 4.2% growth rate of M2 since August gives us pause.  The burst of lending in the Summer of 2011 will not sustain business improvements for long if M2 continues to grow at 4.2%.  December’s ISM was released today and was better than expectations.  This was the best data since June.  This indicates the Summer lending burst is still fueling some economic improvement now, but the stock market reacts to expectations of future growth.

Eurozone Comments:

From the Eurozone there is no significant news on the debt crisis.  The major question regarding Europe is if the money supply will begin growing at a rapid rate combined with expanded lending from banks to private businesses.  European bank lending to businesses shrank to a 1.7% growth rate in November, down from 2.7% growth in October.  The European Central Bank has initiated 3-year LTRO loans at 1% to add liquidity to the banking system, but it remains to be seen if this liquidity will be sterilized, or if it will fuel a more rapid expansion of the money supply.  As European banks increase their cash holdings from the LTRO loans, they might become more likely to make loans.  The next 3-year LTRO loans at 1% will be offered on February 29th in addition to 1-month loans on 1/17 and 2/14, plus 3-month loans on 1/25 and 2/29.  The initial 3-year LTRO added a net of €211 Billion Euros to the banking system, so we could assume the same amount or more (net) would be added between now and the end of February.  There is currently €446 Billion Euros on deposit at the ECB that banks can withdraw on demand.  This is more than enough cash to fund the €270 Billion of new European bonds that have to be issued in the first quarter of 2012.  As all of the rolling over of maturing debt is funded, the cash eventually ends up back in the banks.  With a ridiculous 2% reserve requirement, European banks can grow the money supply via the fractional reserve money multiplier, but only if the decide their capitalization is sound.  The ECB is providing as many loans as the banks want, so it all hinges on the decision of the banks to lend.

The money supply statistics for the Euro are published monthly, and it has a time delay of 1 month.  Euro required reserves are also published monthly with a 1 month delay.  We think US banks will increase their lending rates when they think European banks have done the same.  The bi-weekly data on US banking required reserves will give an indication when this might happen.  US money supply data is published weekly but is delayed by 2 weeks.  We assume US banks will know sooner than the publicly available data if European banks are resuming rapid lending to businesses.  Based on this assumption, watching US money supply and banking reserve data will give a more rapid indication of any relevant changes.  (If anyone is aware of more frequently published data, please let us know.)

Observations regarding the US Federal Reserve:

With the new year the Federal Reserve’s FOMC has a new group of voting members.  The members who lost their rotation vote were thought to be more opposed to policies such as Quantitative Easing.  The new voting membership is more likely to support additional QE if and when Chairman Bernanke decides it is necessary.  The next FOMC meeting is January 24th and 25th.  As those dates approach we expect a resumption of speculation regarding QE3.  Some think the markets and economy must get worse before the Fed would approve another round of QE.  Additional QE by the Fed will not matter if US banks refuse to increase the rate of originating new loans.  It is doubtful US markets will continue to grow as long as US banks hold their $1.47 Trillion of excess reserves as a cash contingency against their potential losses of over $1 Trillion from European debt.  We will continue to watch for news from Europe and the US money statistics, along with daily S&P 500 market data for indications when (and if) a strong bull market will begin.

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