For Tuesday, Sep 27, the market forecast is for growth

We recommend any leveraged ETF that grows with the US market.

Here are some options:

2x Leveraged ETFs


Russell 2000

S&P 500




3x Leveraged ETFs


Russell 2000

S&P 500




Technical Comment:

Monday the S&P 500 rose 2.3% on Monday.  Volume was lower than Friday and lower than the 30-day moving average volume.  The large 2.3% gain was enough to move our automated forecast back to growth as the stop-loss algorithm typically sees such a large gain as a reversal of short-term downward motion.  If the S&P drops around 19 points (1.6%) or more on Tuesday, our forecast will likely switch back to uncertain.

Subjective Comment:

The large market increase was on lighter volume.  This is not a good combination for further market growth.  A healthy market advances on higher volume and retreats on lower volume.  We have seen the exact opposite over the past several trading sessions.

The sovereign debt problems in Europe continue to dominate the financial headlines and appear to be driving the action of the US markets.  The London exchange was up 0.5%, the German market was up 2.9% and the French CAC 40 was up 1.8%.  It is still not clear what political solutions are being developed as news is sketchy and often followed by contradictory reporting.  Whatever the nugget of news that lifted Europe appears to have spilled over to the US.  We have discussed these spill-over effects before, but it’s worth repeating that several large US banks have a lot of exposure to European sovereign debt in the form of Credit Default Swaps(CDS).  For example, if Greece were to formally default on its bonds, the US banks that sold Greek CDS instruments would lose quite of bit of money.  The CDS is like an insurance policy that the bonds will not default.  There is fear the money owed via CDS instruments after multiple defaults could bankrupt US banks otherwise considered To-Big-To-Fail.  The psychological shock to US markets would be highly disruptive and overwhelm any upward forces from the US money supply growth.  Specifically, if the very banks that are expanding the US money supply via fractional reserve lending were to experience huge CDS losses, this would slow the growth rate of the US money supply in addition to the psychological impact, all of which would be negative for US markets.

The recent Federal Reserve FOMC announcement of Operation Twist has failed to give any confidence to the market, and Chairman Bernanke’s negative comments about the economic outlook may have further frightened investors.  It does not appear the majority of market participants grasp the implication of the rapidly growing US money supply (M2) from the fractional reserve banking money multiplier.  The market also does not seem to think the announcement of supplying US Dollar liquidity to European Banks will do much good (this was the coordinated central bank announcement last week).  Operation Twist is not money printing because the $400 Billion of longer-term US Treasuries will be offset by the sale of the same amount of short-term bonds, so the market incorrectly sees the Fed as having tightened its monetary policy.  The opposite is the case.  The Fed has announced it will maintain the near-zero Federal Funds rate through mid-2013.  That will require money printing.  The money multiplier is growing M2 at near record rates, and there will be a lot of liquidity provided to European banks.  Eventually this will cause a manipulated boom in US stocks and consumer prices.

All of this is quite enough money creation, but there is a possibility the Fed might do even more.  Some speculation has arisen that the fall in commodity prices might frighten Fed policy makers with a renewed fear of deflation.  If Ben Bernanke thinks deflation is a risk, he will likely increase money printing again.  His academic background and policy actions have been consistent in this regard.  His monetary policy has been stop-and-go, and it appears his thinking is very flawed (Keynesian economics), but when he fears deflation, he has acted to expand the money supply.  The Fed should stop expanding the money supply and allow the US economy to go through the necessary readjustment (recession) necessary after a period of extended inflation.  It would be healthy, even though US equities would fall in price.  If the speculation turns out to be true, additional money printing by the Fed would be on top of the already highly expansionary money multiplier.

Our official, automated system is forecasting growth for the US market.  Our system only uses S&P 500 data in its analysis.  The money supply growth and European sovereign crisis are not part of the automated analysis.  Continued volatility driven swings can cause our system to frequently switch back and forth between growth and uncertain.  Caution is advised before getting back into the market.  Consider waiting until our forecast has been for growth for a few days in a row.

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