For Tuesday, February 14, 2012, the market forecast is a growth-trend

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 index increased 0.7% on Monday, but volume was below Friday and below the 30-day moving average volume.  If the S&P 500 index were to drop about 5 points (-0.4%) on Tuesday our forecast could change to uncertain based on the logic of our stop-loss algorithm.

Subjective Comment:

The increase in the S&P 500 index on Monday occurred on light volume.  Bull market strength is usually signaled by up-days in the index accompanied with strong volume.  An up-day on light volume does not signal weakness nor strength.  The patterns emerging in the daily market data are more similar to those predicting continued growth, but presently there are no patterns fully formed.  NYSE volume on Monday was the lowest for a non-Holiday in over a decade.  The S&P 500 volume was light but not as light as the NYSE.

According to financial headlines the US markets rallied on Monday in response to austerity measures passed by the Greek parliament.  If Monday’s advance was in response to Greek legislation, it was a very light volume response.  Light volume is typical when investors with massive resources (such as mutual fund and hedge fund managers) decide to hold their current positions while seeking more information.  This clears the way for less informed market participants to engage in speculative trading, so the idea that news from Greece could have caused the market reaction becomes more likely.  The more relevant question is what are the large investors thinking?  We don’t know, and the serious market investors with lots of wealth to manage rarely divulge their strategies.  If the Greek austerity vote was good news for the market, then Moody’s downgrades of several European countries could be negative for the market on Tuesday.

We would like to emphasize something regarding our automated market forecasting process.  It does not forecast how long a trend will last.  Our technique looks for patterns that have historically indicated turning points and then forecasts a change in trend.  It also has a stop-loss algorithm that creates cautionary signals in addition to the trend forecasting.  We do not attempt to predict how long a trend will endure nor what level the market index will reach.  Our subjective comments add insight from Austrian Business Cycle Theory (ABCT) to provide a more complete picture to go with our forecast.  From ABCT we see three possible future scenarios for US markets:

  1. The least likely scenario is for the Federal Reserve to reverse its current course and raise interest rates by halting the expansion of the US money supply.  This could include shrinking the money supply.  This would crash the US economy and markets.  This course of events is unlikely to happen until price inflation gets very bad.
  2. The Federal Reserve continues to expand the US money supply around a 5% annualized rate.  The reason for the current bull-market in US stocks is the sudden expansion of the US M2 money supply that occurred last summer in June and July.  This was caused by a burst of banks originating new net loans at a rapid rate.  Since this burst, US M2 growth rate has returned to the 5% rate where it had previously been.  (See details here.)  ABCT describes how accelerating growth in the money supply will cause a bubble-boom, and that is what is happening now.  If money supply growth does not continue to accelerate, like we have now, eventually the bubble-boom ends.  We are concerned this is what will happen, but it’s just as likely scenario 3 will occur.
  3. Scenario 3 entails an acceleration of the US M2 money supply growth rate.  Should this happen in the near future the current bubble-boom duration will be extended.  The source could be either additional Quantitative Easing or accelerated bank lending.  QE is unlikely without a crisis, but bank lending could happen at any moment.

Scenario 2 and 3 both result in very serious price inflation.  The bubble-boom the US is currently experiencing will eventually end.  It ends when the Federal Reserve slows or stops the money supply growth.  If the Fed fails to stop creating new money, then hyperinflation results and the currency completely collapses.  We are not predicting hyperinflation.  We are simply stating the only possible outcomes from our current situation.

Price inflation is already getting pretty bad although it doesn’t get much press coverage.  There is more evidence of price inflation every day in addition to the Consumer Price Index which is best represented at Shadowstats.com.  With a presidential election this year much of the news will have a political bias of one sort or another.  Right now the improving economy is mostly ignored by both political parties.  One party seeks to expand stimulus spending and the other is attempting to blame the recent recession and lingering unemployment on the other, so both are motivated to ignore the mounting evidence of the new bubble-boom and manipulated bull-market.  We would guess each political party will eventually attempt to take credit for the economic improvements, followed by both sides blaming the other when price inflation gets worse.

We continue to advise investing in leveraged index funds as part of your strategy to grow your portfolio faster than the rate of price inflation.  We admit the current situation is uncertain regarding how much longer the bull market will persist, but our best guess is that it will continue for a while longer.  We are currently in Scenario 2, but Scenario 3 could easily happen at any time.

Recommended Reading:

Today at mises.org was an article by Ludwig von Mises.  It gives a brief explanation of the business cycle.  Austrian Business Cycle Theory is a rich and complex theory, but this brief essay is very good at explaining some of the key points.

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