For Thursday, Oct 20, the market forecast is for growth

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

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:

US markets closed down on Wednesday, with the S&P 500 declining 1.26% on volume slightly higher than Tuesday and slightly above the 30-day moving average volume.  This makes 2 down-days on higher volume in the past 3 trading sessions.  This is the beginning of a pattern that precedes further downward movement in the market, but the pattern is only beginning to form and is not complete.  The S&P 500 would have to decline about 27 points on Thursday (2.2%) to cause the stop-loss algorithm to switch our automated forecast to uncertain.

Subjective Comment:

The S&P 500 continues to experience technical resistance to upward motion in the range of 1216 to 1226.  The downward motion of US markets is interesting because European markets were up on Wednesday.  In every bull market there are down-days, and we think Wednesday was just that.  On Tuesday the Producer’s Price Index (PPI) showed strong growth, while the Consumer Price Index (CPI) released on Wednesday showed mild growth.  We have been discussing how Austrian Business Cycle Theory (ABCT) describes how the expanding US money supply will drive up stock markets and consumer prices.  The fact PPI is growing strongly (and faster than expected by mainstream economists) while CPI is growing slowly is consistent with ABCT and the capital structure that results from monetary expansion.

Capital Structure Overview:

When interest rates fall, business projects that require a long time to complete appear to be more profitable.  Conversely, as interest rates rise, long-time projects become more expensive.  Imagine a constant money supply that does not inflate from printing or fractional reserve lending.  If more and more people want to save for the future, those saved funds can be invested.  With more funds available for investment, the supply of funds increases, and as supply increases the price falls.  In this case, the price is the interest rate, so the interest rate falls.  This is the market signal that longer term projects should be initiated.  If people decide they don’t want to save but instead consume, then funds available to lend shrink, and the price, or interest rate, goes up.  This is the market signal that long term projects should not start and business should instead focus on selling consumer goods.

When people save and in turn lend their funds to businesses via lower interest rates, they have to wait until the investments are repaid before they can spend their money.  This might seem obvious, but it is a critical point to understand.  When banks create new money by printing or fractional reserve lending, this new money is available to drive down interest rates.  This signals businesses to invest in long-term projects.  However, at the same time people have not contributed the savings necessary to drive down the interest rates.  They still have their money available to spend, so they continue spending.  This is how the newly created money causes inflation.  If people lend money to others, the borrowers can spend the money but not the lenders.  If people don’t lend, they can spend it but the borrowers can’t.  When money is printed and given to borrowers, the borrowers can spend and so can the people who did not lend.  Since no one is abstaining from spending, all prices are bid up.  The things that go up in price first are the things businesses and consumers both need at the same time, such as oil and petroleum based products.  Price inflation does not happen smoothly across all classes of goods.  Those taking the loans tend to spend the loan quickly, so the supplies needed for long term projects are purchased first when new money is printed.  The sellers who receive the funds enjoy a large demand for their products and make profits, so they in turn start to spend.  This process continues until all prices rise.  This explains why Producer’s Prices (PPI) go up before Consumer Prices (CPI) in response to growing money supplies.

This is a simplified explanation of a detailed economic topic.  The topic is called “Capital Structure” or sometimes “the structure of production”.  The short takeaway is a rising PPI before a rising CPI is consistent with the Austrian Business Cycle Theory when the money supply is growing at an accelerating pace.  The predictions of increasing prices, including stocks and other consumer goods, will come to pass.  Wednesday’s downward action does not appear to be a serious concern for long positions.  The rest of this week could be up-and-down action as the market waits for the next announcement about Europe expected from the G20 summit on Sunday.

For cautious investors, consider waiting until the S&P 500 moves above the 1216 – 1226 range on strong volume for your confirmation the bull rally has begun.  This might not happen until next week.  If you can tolerate more risk, you might consider the pull-back that happened on Wednesday as an opportunity to invest at a lower price.  Remember to invest in leveraged index funds so you can grow faster than the coming price inflation.

Historical Note:

24 years ago, on Monday, October 19, 1987, stock markets around the world crashed.  The Dow dropped 22.6% on that one day, now called “Black Monday”.  The stock market crash then is explained by Austrian Business Cycle Theory, just as the crash in October of 1929 and all other market crashes in history.  ABCT explains the boom-bust cycle caused by money printing.  Central banks prefer calling what they do monetary policy, which is price-fixing interest rates.  All price-fixing causes distortions in markets.  Massive money printing to price-fix interest rates causes massive distortions.  ABCT explains the bust phase just as well as the boom phase.  Europe is entering the bust phase now and has been for several months.  The US is entering the boom phase.

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