For Wednesday, June 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 advanced 1% on Tuesday with volume above Monday but below the 30-day moving average volume.  The advances in the index over the past several days now have the S&P 500 41 points (3%) above our stop-loss trigger.  A decline of 3% on one day is very unusual so it is unlikely our forecast will switch back to uncertain tomorrow.

Subjective Comment:

The advance in US markets on Tuesday was on volume lighter than the 30-day average.  That volume on Tuesday was above Monday does not really make Tuesday a strong-volume day because Monday was very light.  The advance over the past several days in the S&P 500 is now of sufficient interest to keep close track to see if a new trend is developing.  We have not seen enough yet to convince us an up-trend is developing.  More strong-volume up-days are needed for that.

We think the most likely cause for the advance in US markets on Tuesday was information published by Goldman Sachs.  In this information was a specific prediction of what the Federal Open Market Committee (FOMC) of the Federal Reserve might do during their 2-day meetings that ends Wednesday.  The FOMC meeting announcement comes at 12:30 PM Eastern, followed by statements and a press conference during the 2 o’clock hour.  Goldman Sachs predicted a new QE3 with monthly money printing in the $50 to $75 Billion range.  With the current US M2 (not seasonally adjusted) money supply at $9.88 Trillion, this would cause the money supply to grow around 6% to 9% annualized.  Depending on the nature of the program and the decision of US banks to either accelerate lending or accumulate more excess reserves, the overall money supply growth might be a little higher.  There is also a possibility QE3 could be “sterilized”, meaning the money from the Fed used for asset purchases would be raised by the sale of other assets instead of money printing.

It appears market participants think the Fed is about to begin a lot of money printing, and the stock price increases reflect the bet this will happen as some people choose to invest ahead of the Fed announcement.  We do not know what the Fed will do, but the initial reaction of the stock market following the announcement might not be the correct reaction.  If QE3 is announced, we speculate the initial reaction will be a sharp move up in the markets.  However, if QE3 is “sterilized”, then the Fed action will not matter and the market ought to decline.  Market participants who react to headlines often fail to understand these detailed nuances that are buried deep in the press release.  If unsterilized QE3 is announced, then the size and rate will matter.  Any growth rate less than 7.5% (annualized) will not be enough to sustain the bubble boom.  7.5% was the US M2 (NSA) growth rate from August last year up to about 3 months ago, and since then M2 has been flat.  Austrian Business Cycle Theory explains that a bubble-boom can only be sustained by accelerating growth rates in the money supply.  If M2 grows at 7.5% or less the market will continue to bounce around and move sideways, and probably with increased day-to-day volatility.  If M2 remains flat (zero growth) from sterilized operations, then US markets will decline in the near future.

It is unfortunate the US economy and stock market are so heavily influenced by the monetary policy (money printing) by the Federal Reserve.  No one should have this kind of power, not even elected officials.  Money printing causes interest rates to be artificially low, and this causes projects and businesses to start that otherwise would appear unprofitable.  These projects will eventually be unprofitable because there will be no customers to purchase the output when the projects are complete.  Housing is the best example.  There is a huge supply of vacant houses, yet there are also new homes being built as the low interest rates encourage builders to initiate new construction.  You might have seen construction of new buildings where you live, or perhaps road construction or other very expensive projects in progress.  This is unsustainable mal-investment encouraged by the artificially low interest rates.  This is how the business cycle of boom and bust happens.  The boom-bust business cycle is not a “natural” part of a free enterprise, capitalist economy.  It is the result of money printing intervention.

We will carefully analyze the FOMC announcement on Wednesday and provide recommendations based on the content.  Until we can fully process the Fed’s information we will not be changing any of our investment positions.  We advise holding price inflation hedges for the long term and avoiding all bonds and US equities.  Hold cash or a risk-off position.  Our advice concerning US equities might begin to change over the next few days based on the Fed announcement and subsequent actions.

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