For Friday, January 13, the market forecast is for growth

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:

Thursday the S&P 500 closed up 0.2% on volume higher than Wednesday and above the 30-day moving average volume.  If the S&P 500 closes down about 3 or 4 points on Friday (about 0.5%) our automated forecast could switch to uncertain based on our stop-loss algorithm.

Subjective Comment:

Big news today!  The growth rate of the US M2 Money Supply (seasonally adjusted) has jumped up sharply.  Non-seasonally adjusted numbers are also up, so this is not just a manifestation of a data anomaly by the Federal Reserve.  The chart below shows the M2 (SA) growth rates (weekly data) going back 18 months.

Prior to last summer, M2 grew at a steady 5.3% annualized rate.  The summer burst of lending by US banks caused M2 to grow at 33%, adding $470 Billion to the money supply in 2 months.  In early August last year we think US banks became quite concerned about their exposure to the worsening European debt crisis.  In response, we speculate they cut back the origination of new loans resulting in the slower 4.1% M2 growth through the end of 2012.  The burst of summer lending is what has caused the US economy and stock market growth since September.

The M2 data jumped up sharply the week ending January 2nd.  The jump is 3.5 standard deviations above the straight-line trend.  For comparison, this is a 40% annualized growth rate in one week.  The average weekly increase of M2 has been about $8.2 Billion most recently, and the most current data point jumped $86 Billion in one week.  The M2 growth rate has increased 10 fold!

This could be the beginning of a trend.  The most likely cause is the European Central Bank’s new 3-year LTRO 1% loans to European banks.  If we are correct that US banks cut back lending and held their $1.5 Trillion Dollars of excess reserves from fear they could lose between $1 Trillion to $3 Trillion Dollars, then the timing of the ECB’s LTRO and this jump in US M2 makes sense.  The ECB’s LTRO program appears capable of providing enough funds to roll over maturing sovereign debt across the Eurozone and simultaneously keep European banks afloat.  It’s not clear if it will be enough to prevent a Eurozone recession.  If US banks believe the LTRO will prevent defaults and losses, then they will feel comfortable resuming loans to fuel another bubble-boom in the US economy and stock market, even if there is a recession in Europe.

If M2 continues to grow at this accelerated pace the consequences will be a boom in US stock markets, improvement in economic indicators in the US economy, and eventually higher levels of price inflation.  This is one data point, but the timing with LTRO makes it very likely the beginning of a new trend.  Next Thursday we will have another update where a better read on a trend will be available.  Our subjective comments have been listing reasons for caution and the possibility for a boom.  With this information we are now more bullish.  Risks remain and we expect high volatility could return if the US booms while China and Europe enter recessions as appears likely.  Our automated forecast remains close to switching from growth to uncertain.  Now is a good time to start moving more of your portfolio into leveraged index funds to take advantage of the potential boom that is coming.  Remember, all of this monetary growth will bring high price inflation.  It is an evil reality that risky leveraged investing is necessary to try and get ahead of price inflation.  Aggressive investors should invest quickly.  Cautious investors are encouraged to move more of your portfolio into US markets and watch what happens every day from here.