For Tuesday, January 17, 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:

Friday the S&P 500 declined 0.5% with volume below Thursday and lighter than the 30-day moving average volume.  We thought a decline of Friday’s magnitude could flip our forecast from growth to uncertain.  Our forecast almost changed.  An algorithm designed to minimize spurious changes in the forecast was invoked, keeping our forecast at growth.  However, the S&P 500 is very close to flipping our forecast to uncertain and a small decline on Tuesday would likely be enough to trigger the change.

US markets are closed on Monday to observe the Martin Luther King, Jr. Holiday.

Subjective Comment:

The most important news for US stock markets is the one-week jump in the growth rate of the US money supply.  Austrian Business Cycle Theory (ABCT) explains how a growing money supply artificially lowers interest rates and thus stimulates an unhealthy boom of investments that eventually will go bad.  As long as the money supply grows fast enough, excess resources will be diverted into the bad investments and the economy will boom.  Commodity prices and stock markets boom and labor is redirected into lines of production that are unnecessary relative to true consumer demand.  This is the boom.  When the money supply expansion slows or stops the boom will soon end and an economic correction is necessary to liquidate the bad investments.  This is the bust, also called a recession.  Recessions would be short if not for government interference in the liquidation process.  Bailouts, unemployment benefits and minimum wage laws are all examples of government interference that slows the correction and lengthens the recession.

The US has been in a recession since the crash in late 2008.  The Federal Reserve has been trying to reignite the bubble-boom via QE1 and QE2, but US banks held all that cash instead of lending due to fears the loans would go bad.  This past summer US banks began rapid lending and then hit the brakes when the European debt crisis spooked them.  Now that the European Central Bank has initiated the 3-year LTRO 1% loans US banks are not as fearful of losses from Europe.  It appears US banks have resumed rapid lending.  If US bank lending grows US M2 money supply around the 40% annualized rate during the first week of the up-tick, this will be more than enough to initiate the boom phase of the business cycle.  The sovereign bond auctions from Europe continue to show improvement from the sovereign seller’s perspective.  Yields are down.  Italy sold 3-year bonds at 4.83% Friday, down from 5.62% two weeks earlier.  They were able to raise their planned amount of €4.75 Billion Euros.  This and previous bond auctions across Europe are the evidence the LTRO is working to ease US bank fears of losses.

The ECB’s LTRO will do enough to prevent sovereign defaults, but a recession in the Eurozone economies appears likely.  The Euro money supply has been around 2% growth for two years and does not show signs of accelerating.  The money printing the ECB has engaged in has either been sterilized by asset sales or hoarded by European banks.  Unless banks resume lending the money supply will not grow as a result of fractional reserve lending.  The potential for a recession in Europe is why several countries were downgraded by S&P on Friday.  China also faces a serious economic crash and recession as serious price inflation has forced the People’s Bank of China to slow the growth rate of Yuan significantly.  After years of massive money printing there is enough social pressure that the PBOC is unlikely to resume printing fast enough to avoid the inevitable bust.  As China and Europe crash and enter a recession this will put downward pressure on US markets.  If US banks are rapidly lending at the same time there will be tremendous upward pressure on US markets.  Additionally, if foreign countries sell their US treasury bonds this will result in Dollars currently overseas returning to the US economy, further accelerating the money in circulation.  On top of this, there continues to be speculation the Federal Reserve could initiate QE3 to buy massive amounts of Mortgage Backed Securities.  The next FOMC meeting is January 24 – 25.  Some think QE3 will be launched then, others think QE3 will not begin until March.  All of this has the potential to explode the US M2 growth rate to fantastic heights.  The consequence will be rapid price inflation.

In the very short term there are down-side risks to US markets.  Geopolitical tensions between Iran and the US are intensifying.  Europe and China face serious market declines and recessions.  European downgrades could spook investors.  US market volume remains light suggesting many investment funds remain in cash positions as uncertainty remains.  We think the US M2 growth rate will continue to rapidly expand the money supply and ignite a US market boom.  This boom will be highly volatile as the down-side risks will cause pull-backs along the way up.  We’re not sure how long the boom will last.  It is very likely serious price inflation will develop within a few months and that could slow the growth of the boom.  How the Fed and US banks respond will determine how fast the boom will happen and how long it will last.  Leveraged index funds are one option to stay ahead of price inflation.  Aggressive investors should already be in the market.  Cautious investors should move some funds into the market and be ready to more in quickly.  If you have not read our post covering the US M2 growth spike, please do.

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