For Friday, May 25, 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 was down most of the day Thursday and then closed up 0.1% for the day on volume lighter than Wednesday but just above the 30-day moving average volume.  Our automated forecast remains for growth trend.  A decline of the S&P 500 on Friday of about 13 points (-0.9%) would likely be sufficient to trigger our stop-loss algorithm and change our forecast back to an uncertain trend.

Subjective Comment:

Thursday was a mild up-day with volume below Wednesday.  This is weak market action and not indicative of market growth.  The accumulation of strong-volume down-days has taken a break over the last few trading sessions, but their occurrence is not so far in the past as to be considered irrelevant.  The US markets are showing signs of technical weakness and we subjectively think our current growth trend is a false-start signal from our automated forecast.

We have analyzed the weekly US Money Supply (Not Seasonally Adjusted) from the Federal Reserve, and we continue to see signs of a slowing growth trend over the past 4 weeks of data.  The straight-line curve fit through US M2 (NSA) since 8/8/11 continues to decline and is now down to a 6.5% annualized rate after having been in the low to mid 7% range a month ago.  US M1 (NSA) is also showing signs of flattening out, although this is more difficult to see visually because M1 is a much nosier data set.  These regions are shown on the graph below highlighted by the red arrow.

The US M2 residual control chart is shown below, and this is where statistical warning signs of a changing trend continue to present themselves.  The data point 4 weeks ago popped the moving range above the Upper Control Limit, followed by the residual individual value falling below the Lower Control Limit 3 weeks ago.  The most recent data point marks 4 points in a row all greater than one standard deviation from the center line.  We now have a month of data, the 4 most recent points, all pointing to a change in the trend, and that change is a slowing growth rate of the money supply.  These out-of-control conditions are shown on the control chart below inside the red box.

Austrian Business Cycle Theory explains how a bubble-boom happens and why it ends.  The 25% annualized M2 (NSA) growth rate last summer was the accelerated money supply growth to ignite the most recent bubble in the US economy and stock market.  The aggressive growth only lasted two months and has been growing at a constant 7%+ growth rate up until about a month ago when the growth started to slow.  If the US money supply does not resume a higher growth rate soon, the bubble will pop.  If the growth rate gradually slows, the US markets will stagnate and then decline slowly at first.  If the money supply contracts more rapidly, the result could be a rapid crash of US markets.  What the Fed will do, and what US banks might do with their excess reserves, is anyone’s guess.  Based on the current data, we comfortably predict US markets will not grow in the near term.  We are less sure if US markets will move sideways or decline from here.

Our subjective recommendation continues to be accumulation and holding of cash positions.  Continue to hold for the long term any inflation hedges you have.  Avoid all bonds.  Price inflation is the consequence of a growing money supply.  So far price inflation has been mild because most of the money created by the Federal Reserve has stayed in US banks as excess reserves.  The slowing growth in the money supply now also means price inflation is likely to remain mild for the next few months.  Of course, all of this could change in a moment if US Banks accelerate lending or the Federal Reserve initiates another round of Quantitative Easing.