For Wednesday, April 4, 2012, the market forecast is a growth-trend

We recommend any leveraged Exchange Traded Fund (ETF) that grows with the US market.

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 declined 0.4% Tuesday with volume higher than Monday and above the 30-day moving average volume.  If the S&P 500 drops about another 7 points on Wednesday (-0.5%) our forecast could change to an uncertain trend based on the stop-loss algorithm in our automated forecasting process.

Subjective Comment:

Tuesday’s decline was on higher volume resulting in a strong-volume down-day.  In the past 4 weeks the S&P 500 has had one strong-volume down-day per week.  This is not frequent enough to form a pattern predictive of decline.  It is generally a negative sign for a bull market trend when these days occur.  As long as these days remain infrequent we expect the market to continue to advance.

The Federal Reserve published the FOMC meeting minutes from the March 13th meeting.  This resulted in a lot of analysis and comments within the financial media outlets with speculation about another future round of Quantitative Easing (QE3).  In the prior rounds of QE the Fed was fighting the rapid deflationary contraction of credit that happens during the crash phase of the business cycle.  Despite these efforts the money supply growth still slowed and M3 even contracted.  The Fed can significantly influence the economy and the stock market by printing money as explained by Austrian Business Cycle Theory (ABCT).  US Banks also have a huge influence on the money supply through the fractional reserve lending money multiplier.  As M3 contracted along with the stock market and economy crash, banks refrained from lending.  This is what happens during the crash phase of the business cycle.  All of the Fed’s efforts failed to reignite bank lending and the money printed for QE1 and QE2 now sits as $1.5 Trillion Dollars of excess reserves in the US banking system.

Banks are earning 0.25% by keeping this $1.5 Trillion on deposit at the Fed.  The Fed did not historically pay interest on these deposits, but began doing so in October 2008.  This yields $3.8 Billion Dollars of risk-free profits for banks each year, so banks will refrain from lending until they have better opportunities or the Fed stops paying interest on these reserves.  Currently bank lending and the Fed’s operation twist are growing the US M2 money supply (not seasonally adjusted) at a 7% annualized rate.  Back in June and July of 2011 M2 (NSA) grew at 25%.  This was after QE2 was complete and before operation twist began, so the 25% growth rate was purely from fractional reserve lending.  The rapid expansion of the money supply last summer is what sparked the current bubble-boom in the US stock markets and economy.  QE3 is not needed to keep the bubble-boom going.  As long as there are indications of an improving economy, the Fed will face stiff political pressure to refrain from QE3.  Most market participants do not fully understand ABCT, but they have made the basic connection between money printing and a growing stock market as the correlation has become pretty obvious.  With the $1.5 Trillion of excess reserves available to US banks, what now matters is not QE3 but what banks do with those reserves.  Watching money supply growth is the key to knowing how long the current bubble-boom will last.  This is what the majority of market participants do not understand.  We think this is why they likely reacted to Tuesday’s FOMC release with fear the market will decline.

All of the Fed money printing and bank fractional reserve lending not only causes the business cycle and asset bubbles, but it is the root cause of price inflation.  Money first flows to the portions of the economy where long-cycle capital goods are produced, and then it flows to consumer goods.  Producer’s prices have been advancing and now consumer prices are increasing too.  Watch for more prices paid by individuals to advance and additional economic indicators to improve as the liquidity-fueled bubble-boom continues.  Given the expanding US money supply along with the bubble-boom and price inflation it will cause, our investment advice remains the same:

  • Sell all your bonds, including TIPS – they will drop in value as price inflation drives up interest rates
  • Research and invest in hedges against price inflation best suited to your situation
  • Invest in leveraged index funds to take advantage of the continuing growth in US markets and keep checking our daily forecast