For Wednesday, Oct 5, the market forecast is for growth

We recommend any leveraged ETF that grows with the US market, but please read our comments before investing.

Here are some options:

2x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QLD

UWM

SSO

3x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

TQQQ

URTY

UPRO

Technical Comment:

The S&P 500 closed up 2.25% on Tuesday with volume much lighter than Monday and below the 30-day moving average volume. The last time volume was smaller than Tuesday was almost a month ago on August 11th. Our forecast has switched back to growth, but about a 10 point drop in the S&P 500 on Wednesday would likely flip our forecast back to uncertain. The frequent switching in our forecast between growth and uncertain has been from the high level of market volatility as this can frequently trigger the stop-loss algorithm within our automated forecast. While our automatic forecast is for growth, a pattern that typically precedes a decline is forming. That pattern is not yet fully formed.

Subjective Comment:

The sharp move up in the US markets on Tuesday was caused by the testimony of Federal Reserve Chairman Ben Bernanke. The S&P 500 had been down 2.2% shortly after the market opened. It climbed back to even near mid-day and sunk again to a decline of 1.8% as Chairman Bernanke was giving his remarks. By the time he concluded his comments, the market was on a strong increase. In 50 minutes, the market moved up 44.6 points, or 4.1% to close 2.25% above Monday’s close. Here were the key points Bernanke made:

  • The Fed can take further steps to sustain a recovery that’s “close to faltering”
  • Options include maintaining low interest rates through mid-2013, reducing interest on excess reserves, and buying more securities (Quantitative Easing)
  • He said the Fed “is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability”.
  • Bernanke also signaled higher inflation this year will not stop the Fed, saying inflation has not become “ingrained” in the economy.

These comments convinced market participants the Fed will resume money printing in the near future. Regardless of any action taken by the Fed in the future, the current annualized growth rate of the 3-month change in the M2 money supply is 23.3%, which is close to an all-time record. The Fed does not need to take any action as bank lending is causing the current growth rate via the fractional reserve money multiplier. This expanding Dollar supply will drive consumer prices and stock prices much higher in the near future.

The crisis in the Eurozone continues to be the downward force on US markets. Greece will default in one form or another. Rumors about a solution have become a daily sideshow in a circus of political and bureaucratic clowns. Italy’s credit rating has been downgraded again by Moody’s. A Belgian bank, Dexia, is moving €180 billion in worthless assets into a bad bank with support of the Belgian government. In other words, Dexia is bankrupt and is being bailed out. See our post for Monday October 4th for the root cause of the Eurozone crisis.

We continue to believe US and European markets will decouple with Europe crashing and US markets growing due to the rapidly expanding US money supply. The action on Tuesday did see this divergence, but we must strongly caution against assuming Tuesday was the beginning of this trend. The drop in volume was extreme. It would be much better to see upward motion in US markets on higher volume, not lighter volume. There have been several down-days on higher volume, and it is clear today was going to be a down-day if not for the comments by the Fed Chairman during the last hour of trading. Tuesday’s up-day on very light volume increases the probability that Wednesday will be a down-day on higher volume. If this happens, it would further develop the pattern that precedes declines. It is probably best to wait and see if a strong up-trend develops for several days before getting back into US markets.

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