For Wednesday, April 18, 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 as our subjective opinion differs from our automated forecast.

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:

US market indices advanced strongly on Tuesday with the S&P 500 moving up 1.6% on volume lighter than Monday and below the 30-day moving average volume.  This upward movement was sufficient to reverse the stop-loss trigger in our forecasting algorithms, so our forecast has returned to a growth trend.  Should the S&P 500 decline about 20 points on Wednesday (-1.4%) the stop-loss trigger could switch our forecast back to uncertain.

Subjective Comment:

One strong day of advance in US markets is not enough to convince us it is time to move investments back into US equities.  The predictive pattern that formed last week suggests the odds of growth or decline are 50/50.  Our forecast flipped back to growth from the reversal of the stop-loss trigger and not from a pattern predictive of growth.  When high market volatility occurs our stop-loss algorithm can produce frequent false signals.  Most importantly, the large index advance on Tuesday was on lighter volume.  When markets advance on light volume and decline on strong volume it is a pattern of weakness and suggests additional decline is possible.

The financial press is reporting that Tuesday’s “Spanish bond auction drew stronger demand than expected… pushing European stocks higher.”  Spain’s bond auction on Tuesday was an issuance of 12 and 18 month bills.  The key thing not being widely reported is that 12 and 18 month bills mature before the 3-year, 1% LTRO loans from the European Central Bank come due.  (Here are some of our earlier posts about the ECB’s LTRO.)  This means European banks can purchase this short-term Spanish debt using LTRO funds and feel reasonably secure of repayment of the bonds before they have to repay the LTRO loans to the ECB.  This Thursday Spain will auction 10-year bonds.  10-year bonds are very unlikely to be purchased with LTRO funds, so the Spanish Thursday auction will be watched closely.  A bad auction on Thursday could cause markets to decline.  It’s really not all that unexpected that short-term European bonds would do well at auction given the LTRO funds that remain in the European banking system.  US markets likely advanced in reaction to the assumption by many that Tuesday’s Spanish auction was a sign the Eurozone debt crisis might be under control.  That is a bad assumption.  Austrian Business Cycle Theory explains why economies (and stock markets) go through booms and busts.  It has nothing to do with the free market and everything to do with the fraudulent practices of central bank money printing and fractional reserve lending.  The Euro money supply growth rate remains very low (2% – 3%) compared to pre-crisis highs (10%+ back in 2007).  For more on the Euro money supply, see this previous post.

We recommend staying out of the market through at least Thursday this week.  Thursday will bring the following information:

  • Results of the Spanish 10-year bond auction and market reaction
  • Weekly US money supply statistics
  • Two more days of US market data

If Tuesday’s strong advance in US markets is the resumption of a bull trend, then the market will continue to go up and it will do so on stronger volume.  If markets react favorable to the Spanish auction and if US money supply growth rates accelerate, we will feel more confident recommending investing in US equities.  Until and unless we see these things, we’re unlikely to change our subjective opinion.  Consider researching investments to hedge against continued price inflation and sell all your bond holdings as they will decline in value as price inflation continues to get worse.  If you choose to remain in cash, please avoid money market funds as they have exposure to European sovereign default risk.