Monday, Jun 27: The current market forecast is for a decline

We recommend any leveraged ETF that grows when the US market declines.

Here are some options:

Inverse 2x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QID

 

SDS

 

 

 

Inverse 3x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

SQQQ

SRTY

SPXU

 

Technical Comment:

The forecast of “Decline” began on June 15th, which was 8 trading days ago.  (Trading days excludes weekends and holidays.)  Historic “Decline” forecasts have a typical duration of 14 to 18 trading days.  The decline forecast could change any day, but the typical duration suggests the current “Decline” signal to end between July 6th and 12th.

 

Subjective Observations:

The most obvious news influencing US markets has been the Greek Sovereign bailout.  Wednesday this week the Greek Parliament will vote on austerity measures necessary to receive bailout funding.  The European creditors have begun discussing alternative means of funding this bailout should the austerity measures fail to pass.  The US market did respond when the vote of confidence passed last week, but the response was very brief followed by downward motion the next day.  Greece is likely to receive the bailout funding needed in the short term, but another bailout payment will be needed within a few months.  When the European debt crisis in Portugal, Ireland, Italy, Greece and Spain finally erupts, it will likely be very bearish for US markets.  This crisis will get much worse within the next 12 months, but it’s short term impact on US markets for the next few weeks is likely to be very small.  This assumes Greece receives the immediate bailout funding needed.  Should that not happen, then the impact on US markets could be very disruptive.

The most likely issues impacting the US markets is the pending end of QE-2 by the Federal Reserve.  Going into the holiday weekend the market will likely bounce around with the interesting action developing next week, but that’s just a guess.  It is not clear that any entity will be able to purchase US Treasury Bonds that are auctioned a few times every week once the Fed stops QE-2.  A failed bond auction would be a big shock.  No European entity seems able to replace the Fed in the purchase of Treasuries, and China appears more likely to send bailout funds to Europe instead.  Of note, the Chinese have been reducing their holdings of US Treasuries for several months and have stated their desire to continue reducing exposure to US debt.  US Banks have large amounts of reserves earning interest at the Fed, so that’s a potential source of funding, but it comes with its own set of problems.

All of this seems to support our “Decline” forecast, but human subjectivity is flawed as we frequently suffer confirmation bias; when we form an opinion, we accept facts reinforcing it and reject evidence to the contrary.   The forecast signal is produced by an automated algorithm that does not suffer such limitations.  It’s not perfect, but it looks for patterns that historically have statistically preceded changes in market trends.  Keep checking the forecast every day.  If you’re uncomfortable investing in a short position, at least consider moving into cash.

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