For Monday, March 12, 2012, the market forecast is a growth-trend

We recommend any leveraged Exchange Traded Fund (ETF) that grows with the US market, but please read our comments below before investing.

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 index increased 0.36% on Friday with volume above Thursday but below the 30-day moving average volume.  The S&P 500 would have to decline about 14 points (-1%) on Monday to trigger the stop-loss algorithm and turn our forecast to an uncertain trend.

The advance of US markets on Friday came with volume below the 30-day moving average.  Friday volume is typically light, so the daily S&P 500 data is difficult to interpret regarding future direction.  Weakness has been forming with strong-volume down-days and light-volume up-days.  Our forecasting process looks for patterns in daily market data that have historically preceded turning points, both topping action and patterns that predict continued growth.  It is common that both weak patterns and strength patterns can develop at the same time, so it takes several days for patterns to fully form.  The pattern over the past two weeks has more weakness than strength, but the pattern over the past three days shows possible strength.  It will take a few more days to see which pattern further develops.  This leaves the current situation very difficult to interpret.  Our forecast has returned to a growth-trend not from the recent strengthening pattern but from a reversal of the stop-loss trigger, so our automated process remains susceptible to frequent changes should up-and-down market volatility return.  In short, we don’t have a technical read to forecast with a great deal of confidence right now.

Subjective Comment:

We remain concerned about the Greek default that occurred on Friday.  The European Central Bank has flooded the Eurozone with over €800 Billion Euros of liquidity, and there is over $1.5 Trillion of excess reserves in the US banking system.  This means there is plenty of liquidity to absorb the €100 Billion Euros that Greece has written off, at least in the short term.  We had hoped Greece would repudiate its debt, but instead they forced bondholders to accept new debt in “exchange” for the bonds that will not be paid when due on March 20th.  After the exchange, Greece now has more debt than before.  The cliché applies; more debt is not the solution to a debt problem.  What all of this means and what the fallout will be will be determined in the near future, and for this reason we still think the next few weeks contain a great deal of uncertainty for US markets.

In addition to the Eurozone debt crisis, we remain concerned about the growth rate of the US money supply when considered in the context of Austrian Business Cycle Theory.  The US money supply has probably grown enough recently that the current economic and stock market bubble ought not to burst for a while yet, but the continued resistance of US banks to accelerate lending increases our concern as the M2 growth remains where it has been for the past 7 months.  For more details on our evaluation of the US money supply, please see the graph and our comments here.

We recommend selling all of your bond holdings and holding cash for now.  Avoid putting your cash in money market accounts as they are exposed to European sovereign bonds, which can clearly default as demonstrated by Greece on Friday.  Also, with the near zero interest rates, you will not miss out on much interest by holding cash for a short while.  If you want to invest in US equities, we recommend holding a partial position if you’re an aggressive investor.  If you’re more cautious, we recommend waiting a few more days to see what patterns develop.  It might even be wise to sit on the sidelines all of the coming week.  The massive amounts of liquidity injected into the Eurozone recently combined with all of the money printing the Federal Reserve has conducted for the past few years is bringing about higher and higher price inflation in the US.  If you’re looking for an investment other than stocks and bonds, consider researching hedges against price inflation.