After the Market’s Biggest September in 70+ Years, Time to Prepare for a Pullback

You have undoubtedly heard that various components or asset classes of the market are, from time to time, manipulated. “Manipulating the market” means that by some purposeful and sometimes with nefarious intentions, a market that should move higher, moves lower… or, as in the case of September, the market moved higher when it probably would normally have moved lower.

If I am not mistaken, the unemployment rate is still near 10%, the housing crisis is far from over — with foreclosures expected to grow, employers are not hiring, our national debt is piling up to such an extent and such a rate as to defy any common sense that it will ever be paid off without some intervening economic event — like double-digit inflation, for example.

The Federal Reserve is using obtuse tactics to move many billions of dollars (created out of thin air) into large institutions (banks) that are buying our own debt and accumulating massive positions in hard-asset stocks on a global scale. This could, and I think will, have a cataclysmic ending of massive economic proportions one of these days in the not too distant future.

#-ad_banner-#The result of all of this is faux growth in stock prices, coupled with unusually low volume, and it has buoyed the market to the biggest September gain in more than 70 years.

Ask yourself a question: do you really believe the economy is strong enough or will be strong enough to justify that kind of upward trend?

I happen to be in the camp that believes the market is being manipulated higher, but maybe I am just trying to understand why a virtual dearth of fundamental reasons exists for such a big run up in the market. It is not that I am unhappy with the big run-up in September. Quite the contrary: the portfolio in my premium newsletter, Mastering the Markets, is literally on fire. Double-digit gains have become the norm. I hear from subscribers every day, thanking me for all the money they have made.

No, I am not unhappy with the upward trend in the market, but as you can see from my forecast for October (below), there is an 80% probability that we will see a huge swoon in October, that is, unless Bernanke and company decide to artificially juice the market. A somewhat more socially acceptable term for this is also called, “Quantitative Easing.”

Why do you care? You should care because if you believe, as I do, that the market could move dramatically lower in the next few weeks, and if you plan on trading with that bearish bias, which I plan to do, then you could lose a lot of money if the market is manipulated higher when it should move lower.

This is why my rules-based approach to an exit strategy is always in place. This week’s trade is recommended because I believe the chart above of the S&P 500 has an 80% probability of being accurate. If the forecast proves to be accurate, then having a short bias in the market makes a lot of sense. If the trade is wrong, then I want out as quickly as I can — so be sure to use a solid and reasonable stop loss on this week’s trade.

My trade for this week is ProShares UltraShort S&P 500 ETF (NYSE: SDS).

SDS is an exchange-traded fund (ETF) that is designed to move up at about twice the rate the S&P 500 moves down. If the S&P 500 moves higher, SDS will drop in price at about twice the rate the S&P 500 moves higher.

Could October be just as booming as September? Sure, but my data and my analysis indicate that the market is due for a correction. Yes, I know there is a sea-change election coming up in about a month. Yes, I know what the polls say about who is going to win and who is going to lose.

But all that is for November — not October. My bet is on a correction sometime within the next week or two — and an SDS play could generate a sizable return.

Action to Take –> I think SDS is a good trade if you’re looking to hedge your portfolio against a possible downturn. I recommend buying SDS with a limit order at $29.21 good for the week and setting an initial stop loss at $27.94. The target price for this trade would be about $37.50, so traders could expect to see a gain of roughly +28% on this trade.