For Friday, April 20, 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:

The S&P 500 dropped 0.6% on Thursday with volume above Wednesday and stronger than the 30-day moving average volume.  7 of the last 12 trading sessions have been strong-volume down-days.  A pattern that predicts a 50% chance of growth and a 50% chance of decline in US markets formed again today.  The decline in the market index was not enough to trigger our stop-loss algorithm, so our forecast remains at growth.  A decline of about 7 points in the S&P 500 on Friday (-0.5%) would likely be enough to change our forecast to uncertain.

Subjective Comment:

The on-going accumulation of strong-volume down-days intermixed with light-volume up-days is a pattern of market weakness.  This pattern suggests growth is unlikely from here.  The complete formation of the 50/50 growth/decline pattern occurred again, marking the 3rd time in the past two weeks.  Another cause for concern is the S&P 500 broke below the index’s 50-day moving average on Thursday.  This technical indicator is followed by a lot of market participants, so the market moving below it could motivate more selling and downward pressure in the days ahead.  These are technical signs of weakness in US markets.

Thursday’s Spanish bond auction was not great, although some of the stories in the financial press attempted to describe it as very successful.  The most important data point is that the 10-year Spanish bond yields were 5.743%.  This was the highest borrowing cost for the Spanish 10-year in the past 5 months.  With Spanish banks bad loans rising to 8.2% of their portfolios in February, there is little reason to think they will use the ECB LTRO loans to purchase long-term Spanish debt.  There were other economic data presented Thursday, so there is plenty to speculate regarding a possible cause for Thursday’s market decline.  Day-to-day ups and downs are less important than the trend, and the technical indicators we follow, as just described, strongly suggest the up-trend is changing.

We have analyzed the weekly US money supply statistics (data here) along with the biweekly statistics on the US Banking system reserves (data here).  We also have looked at the published money supply statistics from Shadowstats.com.  What we see concerns us that the current bull market in US equities and the in-progress bubble-boom in the US economy might soon falter and then decline.  Austrian Business Cycle Theory (ABCT) explains how accelerated growth rates in the money supply (money inflation) will produce the business cycle of boom and bust.  A period of accelerated money supply growth will spark the boom, and that occurred in the US last summer in June and July.  Since then there has been 9 months of steady 7% annualized growth in M2 (not seasonally adjusted), which is strong growth but slower than the mid 20% growth from last summer.  ABCT explains that a slowing growth rate in the money supply removes the fuel the boom needs to sustain itself.  The expansion of the money supply is the root cause of the boom-bust cycle, and the slowing is the trigger that pops the bubble.

The Federal Reserve publishes the money supply data we analyze, and every so often they revise a good portion of the data set.  That happened again with Thursday’s publication.  This did not cause a change in our conclusions as we use a straight-line regression to smooth out the noise, and the growth rates we derive from this technique were not materially changed.  In addition to the continued steady 7% annualized M2 (NSA) growth, we have noticed what now appears to be a clear change in the trend of the Required Reserves of US banks.  For the past 12 weeks, or since the beginning of February, the required reserve growth rate has slowed (seasonally adjusted) from 12% to just under 2% annualized, or has actually stopped growing altogether (not seasonally adjusted) declining from over 23% to 0% annualized.  Since the Fed has not changed the reserve requirements there is only one way to interpret the collapse of growth in required reserves; US banks have stopped net lending since the beginning of February.  (Any new loans have been off-set by the expiration and repayment of old loans.)

Shadowstats.com calculates the money supply growth rates using a year-over-year approach.  This is different than our straight-line regression, so the percentages are not comparable.  It is not bad, just different.  Looking at M1, M2 and M3 from Shadowstats.com, all the year-over-year money supply growth rates have slowed.  Here is the summary of these 3 key points:

  • US M2 growth rates from straight-line regression have remained constant for the past 9 months at a rate much lower than last summer
  • US banks have stopped net lending since the beginning of February (past 12 weeks)
  • Year-over-Year money supply growth rates (M1, M2 and M3) have all slowed

Austrian Business Cycle Theory is the correct economic explanation of the business cycle.  The people who follow monetary theory and others who subscribe to Keynesian economic theory have no good explanation of the business cycle and are consistently wrong in their predictions.  If US banks fail to resume rapid lending very soon, we will see another crash in the US stock markets and a slowing of the bubble-boom underway in the US economy.  Since US banks have actually slowed their net new lending for the past 12 weeks, we think it is unlikely they will accelerate loans anytime soon.  The Fed continues to create new digital money (money printing) to keep interest rates low, but this is currently not enough to sustain the current bubble-boom.  A crash is coming, or at least a stagnation of growth.

When we combine this analysis of the money supply and US banking reserves with the 50/50 pattern produced last week and twice this week by our automated forecasting process, we conclude US markets will not continue to advance from here.  They may bounce around which will confuse our stop-loss trigger, but sustained growth does not appear likely.  We don’t know if US markets will move sideways or decline from here, so we recommend a risk-off position for your investments.  Now is not the time to invest in US equities.  All of the money supply inflation along with the slower growth rates in the money supply is going to cause price inflation to continue and likely get worse.  We encourage you to research investments that hedge against price inflation and choose those best suited to your situation.  Avoid all bonds, including TIPS bonds.  If you own any bonds, sell them.  Price inflation will cause interest rates to rise and bond prices to fall.  This is why we have been encouraging our readers to liquidate bond holdings.  As you move to cash positions remember to avoid money market funds as they have exposure to European sovereign default risk.