For Wednesday, February 1, 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:

The S&P 500 declined 0.05% on volume above Monday and stronger than the 30-day moving average volume.  The small decline at the close of the trading session leaves our automated forecast at “growth” with the possibility of changing to “uncertain” on Wednesday if the S&P 500 declines about 8 points (0.6%).

Subjective Comment:

Tuesday was a down-day on strong-volume, which makes two such days in the past four trading sessions.  This is a sign of market weakness as the past several days are forming a pattern.  The pattern is not complete, but its formation is troubling and warrants close attention over the next several days.  Daily market data and patterns that develop arise from the buying and selling decisions of market participants.  In the following paragraphs we will speculate on external events we think are influencing the market.  Regardless of the accuracy of our conjecture the daily market data reflects the decisions of people participating in the market, and whatever their true motivation might be their actions create patterns that reasonably forecast market direction.  This is the essence of how our forecasting process works.

Banks in the US, Europe and China are not lending.  This is a problem because in the past they have lent via fractional reserve lending, resulting in large increases in the money supply of their respective economies.  Austrian Business Cycle Theory explains how this distorts the capital structure of the economy with too much investment in long-cycle production sectors (producer goods) and under-investment in consumer goods.  Without continued cheap credit those mal-investments will not be completed.  The price inflation resulting from money printing will cause project costs to rise and profitability to fall.  Most of the mal-investments will never turn a profit.  These projects must be halted and written off in order for resources and labor to be redirected to those lines of production that are aligned to the actual demands of consumers.  The central banks have engaged in money printing to hold interest rates down, and governments have provided bailouts and unemployment welfare of various types.  These actions delay the bankruptcies necessary to realign the economy.  If enough money is printed fast enough, another bubble can be created causing an inflationary boom that will eventually go bust.  China and Europe are crashing.  The US economy is stumbling along after a burst of money growth back in June and July.  The US mini-bubble will pop if US banks keep their new loan originations at the current low rate.

We continue to believe banks are afraid of loan losses from the Eurozone debt crisis.  US and European banks are hoarding their excess reserves instead of lending to businesses.  Not only are there potential losses from sovereign debt (like Greece), but also from loans to businesses.  During the inflationary boom in China their demand for commodities drove a huge demand for ships to transport raw materials and finished goods.  The high shipping costs resulted in bank loans to fund new ship construction.  With China’s economy now crashing there is less demand for freight and a glut of new ship capacity.  Consequently freight rates are collapsing (see the Baltic Dry Index).  Collapsing revenues in the shipping industry put the repayment of construction loans at risk of default, contributing to more anxiety for European banks facing losses from shipping loans greater than their exposure to Greek debt.

The next 3-year, 1% LTRO loan from the ECB will be on February 29thSpeculation is beginning on how large the loans to European banks might be.  Given the large amount of sovereign debt that must be refinanced in the next 3 months it is likely any amount will result in additional hoarding as measured by the ECB’s deposit facility.  European banks appear willing to refinance sovereign debt based on the lowering yields of most Eurozone bonds with the obvious exception of Greece that is likely to be unable to make the payments coming due on March 20th.  The Eurozone is very likely to continue limping along as the Euro growth rate has not changed.

Continue to hold your current positions.  We recommend against accumulating more investments tied to the growth of US markets given the current weakness.  When price inflation picks up in the US, which it will after all the Dollar printing by the Federal Reserve, bond prices will drop.  US Treasuries, foreign bonds as well as US state and municipal bonds should all be sold to avoid losses.

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