For Tuesday, June 19, 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 advanced 0.1% on Monday with volume below Friday and lighter than the 30-day moving average volume.  The S&P 500 would have to decline about 30 points (-2.4%) on Tuesday in order for the stop-loss algorithm of our automate process to trigger and change our forecast to an uncertain trend.

Subjective Comment:

Going into the weekend this past Friday there was a lot of trepidation surrounding the Greek elections.  Monday was quite calm for US markets with low volume and little change in the index.  The Greek elections resulted in center-left parties winning and they could likely form a coalition government that will attempt to stay in the Euro.  Time will tell how this will play out.  More concerning are the increasing bond yields for Spanish and Italian debt, and Italy asking the European Central Bank for assistance keeping these rates low.  The Eurozone debt crisis continues and will not be solved by any of the various schemes proposed to date.  The only options are massive money printing by the ECB to delay the day of reckoning, or outright defaults.  The G-20 meeting began Monday in Mexico and it is likely some sort of announcement about the Eurozone could come from this meeting.

Of more immediate relevance for US markets is the Federal Reserve’s FOMC meeting on Tuesday and Wednesday this week.  The Fed will be watched closely by US market participants for any hint of a change in monetary policy.  As we have been writing for over a month now the US M2 money supply has halted its 7.5% annualized growth and has been flat for the past three months.  One possible reason for this would be the Fed targeting a constant Fed Funds rate and having to drain reserves to offset the inflow of Dollars from Europe as people seek to protect their wealth from the Eurozone debt crisis.  While that is still a plausible explanation for the recent change, what is also of interest is the Fed Funds rate itself.  The Fed targets a rate and conducts open market operations to price-fix this rate.  When the Fed Funds rate changes, it is because the Fed chooses to let it change.  Fluctuations of 0.01% from day to day are common.  However over the past two weeks the rate has crept above 0.15% to 0.16, 0.17 and now 0.18% as of 6/15/12 (data here, select daily frequency).  This is very curious as the Fed proceeds into its FOMC meeting.  There has been speculation the Fed wants to initiate another QE program under a different name.  One theory is the Fed has stopped the money growth for the past 3 months to cause economic stagnation in order to justify QE3.  Another theory is the Fed wants to crash US markets and the economy in order to influence the elections this fall.  Of course it is entirely possible the members of the FOMC are so convinced Keynesian economics works that they are just bumbling about with no understanding of Austrian Business Cycle Theory.

Regardless of the reason for the Fed’s actions, the FOMC monetary policy announcement on Wednesday will prove very instructive for the future direction of US markets.  We have no idea what this small group of powerful technocrats might do.  We advise maintaining risk-off or cash positions relative to US equities and selling all bonds.  Hold any inflation hedge positions and continue to accumulate cash until it becomes clear what direction the market will take from here.  The US money supply growth over the past year and for the past 3 months means growth is highly unlikely in the near term without Fed action.  If a QE program is announced on Wednesday the market could move much higher quickly.  If not, a crash is possible.

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