For Friday, June 22, 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 dropped 2.2% Thursday with volume above Wednesday and higher than the 30-day moving average volume.  Our automatic forecast remains at a growth trend but is only 5 points above the stop loss trigger.  A decline on the S&P 500 of about 0.4% on Friday should be enough to change our forecast to an uncertain trend.

Subjective Comment:

Thursday was a strong-volume down-day and continues the on-going pattern of market weakness.  After yesterday’s decision by the Federal Open Market Committee it is not surprising US markets declined so much.  Market participants apparently had time to better understand the Fed’s monetary policy move announced Wednesday.  For a complete understanding of the implications of the Fed’s announcement we encourage you to read yesterday’s post if you haven’t already done so.

We have analyzed the updated US M2 Money Supply (Not Seasonally Adjusted) data published every Thursday by the Federal Reserve (data here, H6 Table 7).  We have established a new baseline using the most recent 14 weeks of data starting 3/12/12 as there has been a clear change in the growth rate of the money supply.  The straight line fit for these 14 weeks shows a negative growth rate of -0.4% annualized.  This new baseline is being used in our control charting of the M2 residuals, and so far all 14 data points are in statistical control.  This further confirms the collapse in the M2 growth rate.

As we explained yesterday, the Fed will not provide more money printing via a new QE program.  The only source of money supply growth is now US bank lending.  The US Banking system currently has $1.49 Trillion of excess reserves, so banks could easily resume rapid lending.  Banks have changed their origination rate of new loans and that’s why the M2 money supply growth rate has slowed.  With the economic indicators in the US, Europe and China all showing warning signs and the on-going debt crisis in the Eurozone, we think it is unlikely US banks will accelerate lending.  Politically there is also the uncertainty about US tax rates that are scheduled to increase in January.  This uncertainty is amplified by election year considerations.  It is very important to keep tracking the US money supply in case banks do accelerate lending.  If they do, they could accelerate the M2 growth rate to 25% annualized or higher.  US banks reached this rate last summer, so it is clearly possible.  Such an event would keep the fragile bubble-boom in the US economy going.  Absent this, we expect the US stock market to crash and the economy to contract again.  Our best guess is this will happen before the November election and might happen as soon as this summer.

If the S&P 500 drops Friday, our automated forecast will most likely return to an uncertain trend.  This will confirm our suspicion that our automated process produced a false start in reaction to market speculation the Fed was going to initiate QE3.  We continue to advise a risk-off position.  Hold and accumulate cash and sell any US equity holding you have.  US bonds might do well in the short run, but we still advise avoiding all bonds.  Also avoid money market funds as many of them are invested in European debt and are at risk of losing value.  Hold your price inflation hedges for the very long term but do not add to them right now.  By accumulating cash you will protect yourself against market declines which are very likely.  We are watching for an opportunity to short the S&P 500.  If you have cash accumulated there could be an opportunity to short the market in the near future.