For Tuesday, February 28, 2012, the market forecast is a growth-trend

We recommend any leveraged Exchange Traded Fund (ETF) that grows with the US market.  Here are some options:

2-Times Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QLD

UWM

SSO

     

3-Times Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

TQQQ

URTY

UPRO

Technical Comment:

The S&P 500 increased 0.1% on Monday with volume above Friday but below the 30-day moving average volume.  If the S&P 500 declines about 4 points (-0.3%) on Tuesday our forecast could change to an uncertain trend.

Subjective Comment:

After opening lower US markets regained their opening losses and closed Monday mixed.  Volume was light but above Friday and the S&P 500 closed slightly up.  The daily US market data continues to lack any indication of developing weakness within the current rally.

The dominate news impacting markets this week will be events in the Eurozone debt crisis.  The Greek default on March 20th appears more likely every day.  Standard & Poors cut Greece’s debt rating from CC to “Selective Default”.  The German legislature voted for another bailout for Greece, but it is still a guess what will happen.  Market participants are expecting and preparing for the default.  The European Central Bank will conduct the second (and supposedly final) 3-year, 1% LTRO loan offering this week (Feb 29th).  European banks accepting these LTRO loans are being stigmatized and are seen as being near insolvent compared to the banks that are not accepting these loans.  In this environment there is a lot of guessing regarding how many Euros the European banks will borrow from the ECB.  The previous LTRO added a net of €211 billion to the Eurozone banking sector.  Most of the funds provided then wound up deposited back in the ECB’s deposit facility.  The LTRO is not technically sterilized as it does expand the ECB’s balance sheet.  If European banks continue to hoard this cash back into the deposit facility, the LTRO will not accelerate the Euro money supply growth rate.  The ECB deposit facility remains near record highs at €477 Billion Euros.  The January money supply estimates from the ECB have been published.  Euro M2 and M3 growth rates remain at very low levels consistent with the past 3 years.  They did up-tick in January, but this could easily be statistical noise and does not appear to be a new trend.

All of this data strongly suggests European banks are hoarding cash as contingencies against expected losses.  The ECB is attempting to grow the money supply via the LTRO loans, but the loans are just enough to keep financing the sovereign bond auctions and little more.  Without bank loans to businesses the fractional reserve money multiplier will not accelerate the growth rate of the money supply.  After years of higher money supply growth rates these low growth rates are the reason the Eurozone debt has become un-payable and the economies are continuing to stagnate. These are the consequences predicted by Austrian Business Cycle Theory.  With just enough money printing to keep most governments afloat the social welfare states will continue to stagnate and experience mild to moderate price inflation.

The situation in Europe will likely put downward pressure on the US stock market rally, but we think the downward pressure will be short-lived.  The US money printing appears to be rapid enough to keep this new bubble-boom going for the time being.  US bond prices are starting to fall as we have been warning.  As US price inflation gets worse, investors will demand higher bond yields to compensate for inflation.  This is why US bond prices will continue to fall.  Get out of your bond positions now before price inflation gets worse and bonds fall further.  TIPS bonds are supposed to be indexed to inflation, but they are indexed to the official Consumer Price Index.  Official CPI grossly understates true price inflation.  We still recommend investing in leveraged index funds to grow your portfolio faster than price inflation.  Any downward pressure from Europe should be considered a discount opportunity to buy into US markets.  Our daily forecast could respond to market volatility by flipping between an uncertain and growth trend.  We will comment on this should it occur.  The growing US banking reserves suggests the US money supply could be about to accelerate its growth again, and that will cause the current rally and bubble-boom to become stronger and last longer.  In the long run the US will face the same debt problems Europe is grasping with now, but in the short term there is an opportunity to invest and grow your portfolio.

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