For Friday, May 4, 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 0.77% on Thursday with volume above both Wednesday and the 30-day moving average volume.  If the S&P declines an additional 16 points on Friday (-1.2%) our automated forecast could switch to an uncertain trend based on our stop-loss algorithm.

Subjective Comment:

Thursday was a strong-volume down-day.  This is a disruption in the developing bullish pattern but not a complete breakdown.  The developing bullish pattern could still form if strong-volume up-days occur, but they must occur soon.  Thursday’s strong decline creates continued uncertainty regarding the future direction of US stock markets from here.  We continue to advise caution and recommend investing in prices inflation hedges, avoidance of all bonds, a risk-off position for US equities and to shy away from money market funds.  This is our subjective opinion and it does differ from our automated forecast.

Every Thursday brings the weekly update on US money supply statistics, and this Thursday included the biweekly update of US bank reserves.  US M2 (not seasonally adjusted) money supply through 4/23/12 is growing at a 7.4% annualized straight-line rate with the 13-week rolling average down to 6.6%.  The growth rate dropped slightly because the week-to-week change saw a decline of $137 Billion Dollars.  This decline caused the first out-of-control condition on the moving range control chart in the past 38 weeks.  This out-of-control on the week-to-week change suggests the slowing in M2 (NSA) might be a non-random slowing of the money supply growth rate.  It could also be statistical noise.  This bears close watching next week to see if a slow-down continues.

US banking reserves (not seasonally adjusted) showed a different change in the biweekly update.  There had been a slowing in the growth rate in Required Reserves (NSA) over the past 3 months, and the most recent update shows a sharp increase.  The most current data falls on the prior up-trend as if there had been now slowdown over the past 3 months at all.  Previously the declining Excess Reserves (NSA) and declining Required Reserves (NSA) suggested a counter-intuitive situation.  These two series usually move in opposite directions unless the Federal Reserve is draining reserves from the system, which we doubt was happening (but possible).  Now the declining Excess Reserves with this dramatic jump in Required Reserves makes sense if banks have been lending.  This reverses our previous interpretation that US Banks were slowing the origination of new net loans.  Either the data was erroneous for the past 3 months or US Banks all of a sudden began loaning money at an annualized rate of almost 360%.  We doubt it was the latter.  It appears US banks have continued lending at the same rate for the past 9 months.  This suggests the Money Supply should continue to grow near the same rate, and is consistent with the fact US M2 (NSA) has been growing at the same rate.

US Bank lending for the past 3 months is now consistent with the money supply growth over the same time period and explains why there has been a very constant M2 growth rate.  At the same time the M2 growth rate itself just had an out-of-control condition on the moving range control chart as the week-to-week value declined sharply by $137 Billion Dollars.  All the evidence points to continued M2 growth (NSA) in the 6.5% to 7.5% range, right where it has been for the past 9+ months.  Since this comes after 2 months of 25%+ growth last summer, Austrian Business Cycle Theory explains why this must eventually slow the bubble-boom that has been in progress for US markets and the economy.

Our best interpretation of this information is for a sideways moving market and stagnating US economy for the near future.  This subjective interpretation based on ABCT is further supported by the recent uncertainty in our automated forecast we have been writing about daily for the past few weeks.