For Friday, June 29, 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% for the day on Thursday after having been down as much as 1.1%.  Volume was above Wednesday’s volume and higher than the 30-day moving average volume.  A decline of about 12 points (-0.9%) on the S&P 500 for Friday would likely be enough to change our forecast back to an uncertain trend.

Subjective Comment:

For two consecutive days the S&P 500 market has advanced on light volume, and then on Thursday it declined on strong-volume.  This is a pattern of market weakness.  After the 4 sessions this week the S&P 500 is virtually unchanged with where it was last Thursday.  This is sideways motion with volatility and it tricks our stop-loss algorithm into false starts.  The continued weakness in the daily data leads us to interpret our technical indicators as unfavorable for growth in US markets.

In addition to our technical analysis, we have analyzed the weekly US M2 money supply (not seasonally adjusted) published by the Federal Reserve (Data Here, Series H6, Table 7).  M2 growth rate remains at 0% for the past 3 months after having grown at 7.5% annualized since last August.  Austrian Business Cycle Theory describes what must happen given this collapse in money supply growth.  The US economy and stock markets will decline.  We are not advocating for a growing money supply.  A stable money supply that does not grow or shrink is best for the economy and stocks in the long run.  This is analogous to remaining sober.  A growing money supply is like getting drunk.  The damage is done when the money supply grows (when a person drinks).  The painful consequences of the crash (hangover) come when the growth stops.  We have no idea what US banks and the Fed might do to the money supply, but the trends appear to be a continued zero growth.  A market crash is coming.  It can only be delayed (not avoided) by a rapid resumption of strong money supply growth.  Again, we are not advocating for this.  We seek only to explain what is happening so you can best position your portfolio.

We also analyzed the biweekly reserves of the US banking system (Data Here, Series H3, Table 4).  Required reserves remain flat.  This means US banks are not originating new loans any faster than the rate old loans are maturing.  Consequently US bank lending will not contribute to money supply growth via the fractional reserve money multiplier.  Excess reserves continue to decline.  This means the Federal Reserve is actually removing money from US banks.  With the Eurozone debt crisis causing near daily headlines and extreme concern, we think it is unlikely US banks will accelerate lending when the Federal Reserve is lowering the amount of money US banks have in reserve.

Our advice remains to hold and accumulate cash as a wealth preservation defensive measure.  We do not know when the US market and economy will crash, so we are not yet advising a short investment strategy.  We are carefully watching our forecasting system for the development of any technical pattern that would predict a market decline.  We have not yet seen such a pattern.  The months of zero money supply growth are why we strongly advise against investing in stocks right now.  US markets might bounce around, but the net movement will be sideways.  US markets are not going to grow from here.  Avoid all bonds as they will fall in value when price inflation catches up with prior expansion of the money supply that has already occurred.  Hold your price inflation hedges but don’t add to those positions right now.  Be very wary of money market funds as they have exposure to European debt.