For Friday, February 3, 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 advanced 0.1% on volume below Wednesday but above the 30-day moving average volume.  To change our forecast to uncertain the S&P 500 would have to drop about 17 points (1.3%) on Friday.

Subjective Comment:

The small upward movement in the S&P 500 index on higher volume is ambiguous regarding its predictive value.  It was not definitively strong.  It was however a day of holding gains following yesterday’s larger increase.  Two days of gains is good, but there were still the two strong-volume down-days within the past week to consider.  Time will show if the bull market up-trend will continue from here or not.  Regarding volumes, we comment on day-to-day volume changes and compare daily volume to the 30-day moving average.  The last time average market volume was this low was 1999.  Average volume has been shrinking since the financial crisis in late 2008.  Recently it seems the rate of average volume decline has leveled off.  Some think this decline in volume is significant.  We think it reflects the changes in credit over the past several years and is not significant for predicting the future direction of the market and economy.

Austrian Business Cycle Theory (ABCT) is the basis for our subjective commentary.  The burst of US bank lending last summer has continued to fuel a bubble-boom in the US economy and stock markets.  When the business cycle is sufficiently stimulated to begin another boom, activity first accelerates in the capital goods sectors and then moves through the economy to consumer goods and services.  Retail sales increased 4.2% in January compared to prior year, and labor hours worked in Q4 showed large gainsThe BLS reported Q4 hours increased by 2.9%, the first annual gain since 2007.  In the manufacturing sector (where economic activity accelerates first) there was a 2% gain in hours, which was the largest annual increase in manufacturing labor hours since 1994!  This news is completely consistent with the capital structure and effects described by ABCT.

We continue to worry about the current bubble-boom possibly popping sooner than later when we analyze the US M2 money supply statistics.  We have graphed the Seasonally Adjusted (SA) and Not Seasonally Adjusted (NSA) data for the past 18 months along with our estimated straight-line growth rates in the image below.

The SA numbers show the jump at the beginning of January, followed by a return to the same 4% growth rate since the jump.  The NSA numbers show a much different picture.  The same jump occurred at the beginning of January.  Since the jump the NSA M2 has been declining and has now fallen to where it was in December.  The NSA numbers are a better representation of the actual money supply, and NSA M2 is now where it was 2 months ago.  As you can see, there is considerable noise in these data series, so several weeks is needed for analysis.  Last week we admitted we subjectively overreacted to the jump in early January.  With the NSA M2 showing no growth in the past 2 months we are concerned US banks may have actually slowed their originations of net new loans.  This data is delayed by almost two weeks and with 1.5 Trillion of excess reserves, US banks can quickly change the growth rate of the money supply at any moment.

ABCT describes how the growth rate of the money supply causes the manipulated bubble-boom and eventual bust in the economy and stock market.  The effect does not happen right away.  The time lag between money supply growth and the economic impact can vary based on multiple factors, but it will always take time for the newly printed money to work its way through the economy.  We are seeing signs that the burst is moving closer to the consumers as this process continues.  Without sustained money supply growth the bubble will burst.  We have to admit last summer’s lending is sustaining current economic growth.  We are relying upon our automated forecast to identify the turning point which it will indeed do if the money supply growth stays at its current rate, or if it slows.  We speculate the Eurozone debt crisis is the major reason why banks in Europe and the US might be slowing their lending.  Regardless of the cause, European banks are indeed slowing their lending rates.  The US M2 money supply data shows US banks have not been accelerating their lending and may have reduced loan originations in December and January.

These are the reasons we are cautious about the current up-trend in US markets.  Aggressive investors could consider adding to long positions.  Cautious investors should not add to current positions.  As the summer burst of money continues through the economy, businesses will start hiring as they will be unable to sustain their increased production by overworking their current labor force.  Eventually price inflation will pick up too.  Exit your bond holdings.  It appears likely there will be an additional up-tick in the US economy, but US markets tend to react to future expectations.  If the money supply growth does not accelerate, eventually market participants will expect a topping out and the bull trend could stall out.  Geopolitical shocks could help or hurt the US market.  The problems brewing in Europe and China continue to be risks.  Continue to watch the news and follow our regular updates.