For Tuesday, May 1, 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 declined 0.4% on Monday with volume below Friday and lighter than the 30-day moving average volume.  The S&P 500 would have to decline about 26 points (-2%) on Tuesday to trigger the stop-loss algorithm in our automated process and change our forecast to uncertain.

Subjective Comment:

Friday market volume is typically light compared to the week, so it was interesting to see Monday’s volume come in below last Friday.  This means Monday was a light trading day indeed.  The index decline of 0.4% on light volume is neither bullish nor bearish by itself.  The strong-volume down-days continue to recede further into the past.  The strong-volume up-days last week still constitute the beginning of a bullish pattern, and Monday’s slight decline does not upset this formation but neither does it complete the formation.  We remain subjectively uncertain what direction the US market will take from here, but we are leaning against further advances in the market.  US stocks could stagnate and remain flat from here or begin a decline.  We’re not sure which.

The deciding factor will be the growth rate in the money supply.  US M2 growth rates remain at a constant straight-line annualized value of around 7%+ for the past 9 months following last summer’s 25%-ish annualized rate for 2 months.  If the US money supply remains as it, the economy and stock market will stagnate.  Austrian Business Cycle Theory (ABCT) explains how a bubble-boom starts where newly created money and credit flows first, and it almost always flows first to the sectors of the economy where longer-cycle capital goods are created.  This means when a bubble pops, the same capital goods sectors slow down first.  In this context it is concerning that Chicago PMI dropped to the lowest level since November 2009 and the Dallas Fed Manufacturing Index dropped to its lowest level in 7 months.  The consumer sector will be the last to slow down.  We’re not selecting data to support our opinion and ignoring the positive data.  We’re applying the information to ABCT and seeing the expected results.

To the extent the Eurozone debt crisis can still negatively influence the US market, there is additional cause for concern.  Several Eurozone countries have double-dipped back into a recession and others, including Germany, are nearing the 2nd consecutive quarter of negative GDP growth which is one definition of a recession.  The monthly Euro money supply statistics were published this past weekend by the ECB (M2 here and M3 here).  The up-ticks from last month have been sustained with growth rates advancing slightly.  Euro M2 advanced from 2.8% in February to 2.9% in March, while Euro M3 increased from 2.8% to 3.2%.  In our judgment these minor up-ticks are insufficient to reignite a bubble-boom in the Eurozone.  European banks are keeping their deposits at the ECB relatively flat.  The only “lending” going on in Europe appears to be banks purchasing sovereign bonds.  All of this suggests stagnation or potential decline in Europe.  This could have a psychological impact on US market participants.  We see no subjective reason to be bullish on US markets right now.

Despite our official forecast for growth, we continue to advise caution relative to US equities.  Instead research and invest in hedges against price inflation which will occur as a result of the expanding US money supply.  Also avoid bonds as they will lose value when price inflation gets worse.