For Wednesday, March 21, 2012, the market forecast is a growth-trend

We recommend any leveraged Exchange Traded Fund (ETF) that grows with the US market.

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 0.3% on Tuesday with volume below Monday and lighter than the 30-day moving average volume.  If the S&P 500 drops another 12 points on Wednesday (-1.1%) our forecast could change to an uncertain trend.

Subjective Comment:

The mild decline in US markets on Tuesday was on light volume, and this is a positive sign during a bull market up-trend.  The market is advancing on strong volume and declining on lighter volume with an overall upward direction.  The S&P 500 is holding its gains by declining less than it is advancing.  The daily market data continues to show strength, so we think continued growth is very likely.

Price inflation is becoming more obvious.  As lenders realize price inflation is resulting in repayment of their loans with Dollars that have less purchasing power, the lenders will demand a higher interest rate to compensate for price inflation.  This is beginning to happen as Treasury yields have been creeping higher.  This is significant not only because it is happening, but because the Federal Reserve is conducting Operation Twist to keep Treasury yields low and yet the yield rates are going up despite the Fed’s ongoing efforts.  Fed Chairman Bernanke even admitted to CNBC in an interview on Tuesday that he is aware of the increase in rates.  In the late 1970s the Fed raised interest rates to fight inflation, but they did so very slowly while continuing to print money.  From mid-78 until early 1980 the Fed essentially set the Fed Funds rate equal to the Consumer Price Index rate of price inflation as both crept upwards from 6.5% in 1977 to just below 15% in March of 1980.  To finally get the rate of price inflation to slow it took a Fed Funds rate higher than the CPI, and that happened because former Fed Chairman Paul Volcker took more drastic action than his predecessor.  The rapid increase in the Fed Funds rate induced a recession and caused unemployment to rise.  We think the Bernanke will react the way the Fed did in the late 1970s.  He will be slow to raise rates, and when he does he’ll do so slowly.  Price inflation will continue to accelerate unless the Fed Funds rate is drastically raised above the price inflation rate and held there.  The digital money printing must be reversed or price inflation will continue to grow.  This is how bubble-booms end.  The only alternative is hyperinflation and collapse of the Dollar.  We don’t know what the Fed will do, but this history offers one possible guide as to how the Fed is likely to respond.  As long as the Fed acts to keep rates low the bubble-boom will continue and price inflation will keep getting worse.  For a more interesting history of this period of time, we recommend this article by Gonzalo Lira.

If you still own bonds, sell them.  Bond prices will drop in response to rising price inflation as we described above.  Research hedging strategies for price inflation and decide what is best for your circumstances.  If you come across the idea of investing in TIPS bonds, forget that advice.  TIPS bonds will decline in value too.  Also be sure to invest part of your portfolio in leveraged index funds that grow with the US market and keep following our forecast.

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