For Thursday, June 21, 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 0.2% Wednesday on volume below Tuesday and lighter than the 30-day moving average volume.  The S&P 500 would have to decline about 35 points (-2.6%) on Thursday for our forecast to change to an uncertain trend based on the stop-loss algorithm in our automated process.

Subjective Comment:

The Federal Open Market Committee (FOMC) of the Federal Reserve completed its regularly scheduled meeting on Wednesday and announced the Fed’s monetary policy.  Yesterday we discussed some of the speculation regarding what the Fed might do, including very specific speculation from Goldman Sachs.  It turns out Goldman Sachs was spectacularly inaccurate in their guess.  The Fed decided to maintain their current monetary policy.  No change of any consequence was made.  The initial reaction of the market was to decline, and then the market whipsawed back up to close the day down only a minor 0.2%.

The complete absence of any change by the Fed suggests the prudent prognostication would be to assume the current monetary trends will continue.  This is very bad news for the US economy and stock market.  Here is what the US M2 (Not Seasonally Adjusted) money supply has done over the past year:

  • JUN 20, 2011: M2 was $9.08T and had been growing at 6.7% Annualized for over a year
  • AUG 8, 2011: M2 was $9.45T and had been growing at 24% Annualized for 7 weeks
  • APR 16, 2012: M2 peaked at $9.97T and had been growing at 7.5% for 36 weeks
  • JUN 4, 2012: M2 is $9.89T and is no longer growing at all

According to Austrian Business Cycle Theory (ABCT), it is the growth rate of the money supply that matters.  The US economy had stagnated after growing at a constant 6.7% for over a year as of last summer.  QE2 had just ended and during 7 weeks US banks accelerated new loan originations.  This burst of lending caused the M2 growth rate to shoot up to 24%.  Just as suddenly as US banks had accelerated lending, they slowed after August 8th, 2011.  This burst of lending was a huge acceleration in the money supply growth rate and just as ABCT describes, a bubble boom began in the economy and US stock markets.  Why US banks began lending rapidly and suddenly stopped is unknown, but we speculate it was their response to the Eurozone debt crisis.

There has been zero money printing by the Fed since last August as they have engaged in sterilized bond purchasing to “extend the maturity of their bond portfolio”.  This operation has been called “Operation Twist” in the financial press, and according to the FOMC statement the Fed will continue this policy.  This means the US M2 money supply growth since last August is entirely due to US bank lending.  US banks originated new loans at a pace to create a 7.5% growth rate in the M2 money supply through April 16th when M2 peaked at $9.89 Trillion.  Since then M2 has been flat, meaning zero growth.  The M2 money supply might even be falling at a -2% annualized rate, but it is too soon to tell for sure what the new trend will be.  What is obvious in the weekly data is the new growth rate is near 0%.

ABCT describes how the bubble boom starts when the money supply growth accelerates.  ABCT goes on to describe that the bubble boom will end if the money supply growth fails to continue its acceleration.  The steady 7.5% growth from August through April was not enough to keep the boom going after the 24% growth spurt last summer.  Economic indicators and the lack of stock market growth show this slowing of the boom.  Now that money supply growth has collapsed to 0% the bubble must and will pop.  The FOMC had the opportunity to attempt to keep the bubble boom going through a QE3 program but decided to leave monetary policy unchanged.  If US banks do not accelerate lending and the US M2 growth rate remains below 8% to 10%, a crash will come.  There are too many uncertainties and economic factors to subjectively guess when the crash will happen, but every day the M2 growth rate remains near 0% the market and economic crash gets closer.

It was just a few weeks ago on June 11th our automated forecasting process identified in the daily S&P 500 data a pattern that predicts a 50% chance of growth or decline.   Since then the growth in the market has been mostly on light volume.  Over the past few months there have been many strong-volume down-days.  Our technical forecasting system is giving warning signs.  The current “growth trend” forecast it has produced is from the stop-loss algorithm within the automated processing, and we think this is a false-start and that our automated process has been fooled by the recent market action.  The speculation by many market participants that QE3 was coming caused the market to advance, and our forecasting process responded to this growth.  When combining Austrian Business Cycle Theory we are able to say with a great deal of certainty the US stock markets will not significantly grow from here without a change in the money supply growth rate.  Now that the Fed has announced their intention to leave monetary policy unchanged, it has become more likely US markets will soon decline.  We doubt US banks will accelerate lending, so a crash is the most likely outcome in the near future.

Our investment advice for now remains to accumulate cash positions and maintain a risk-off stance relative to US equities.  Avoid all bonds and be very weary of US money market funds as they have risk to Eurozone debt.  We expect continued economic and market turbulence in China and Europe which will have spillover effects in the US.  The 0% growth rate of US M2 means US markets will not grow.  We are not yet advising short positions for US equities, but this is something we will be considering as we watch trends develop.  If you have price inflation hedges continue to hold those for the long term but do not add to those positions now.  Price inflation hedges will likely decline in value over the next six months, so be prepared to hold them for the very long term as it is likely the Fed would resume a QE money printing program if US stock markets were to dramatically crash.