It is trade day Friday because September 29 represents the last Friday in September.

Backtesting tracking assumes that rankings on trade days are used to take positions at the open on Monday. For Monday’s open, the three top-ranked ETFs based on the proprietary momentum ranking system are IWM, EWG and XLB. The rank order of the top 25 are shown in the table below. So too are previous week rankings:

Trade Day Friday — September 29, 2017

Market Commentary

Every metric suggests current valuations are too high. Yet, markets continue higher, and continue to set new records. The old saw of “Don’t fight the Fed” does not seem to hold here. The Fed is telling us they are going to tighten, yet markets ignore this admonishment. It is as if markets have figured out that the Fed doesn’t mean what they are saying or that the Fed no longer matters.

The Federal Reserve

The Fed does matter, although its pretense to be able to forecast accurately and dampen economic and market swings is nonsense and always has been. The Fed matters in the sense that, with or without credibility, the effects they have on money, credit and interest rates do matter. The scary part of all this is that the Fed is akin to the Wizard of Oz in attempting to make you believe it knows all and controls all. It is ignorant and has little control over the variables it pretends to set. Its fraudulent claims exacerbate both market and economic swings. Instead of smoothing cycles, it creates them.

The economic and market crash of 2007 was created when the Fed infused liquidity into the system to offset the mistakes it made that led to the dot.com crash in 1999. Attempts to “save the world” from its mistakes in 2007, which included bailouts and distortions funded by trillions of dollars of new liquidity, have driven stock prices to the current bubble. There will be no meaningful drawdown of the Fed’s balance sheet. Such action would collapse this house of cards.

Markets seem to believe that the Fed cannot restrain itself without risk of a Depression. In the sense that this expectation is correct, markets can go much higher than where they are now.

Implications

Markets continue to be dramatically overpriced. The Fed has done and will continue to do everything it can to prevent collapse. But, it is such nonsense that led to the last two busted bubbles. We are well into the next one. If you believe the Fed is competent (I do not), then you probably should bet on higher prices. Perhaps they can continue this charade a bit longer.

Credit expansions always lead to inflation. In this case, the inflation is reflected in the price of financial assets. It has produced little effect on the economy. The United States is not a lone offender in this regard. The entire developed world has maintained its standard of living via debt, debt that is now so large that is is un-serviceable.  Most of this debt will default, either contractually or by inflating it away.

For much of its hundred year history, the Federal Reserve has been a political tool. Its supposed twin mandates — low inflation and full employment — were impressive, apple pie and motherhood goals. In reality, the real mandate was to keep the good times going so that political hacks could retain their power. There is an inevitable end to such political shenanigans and it was explained long ago by Ludwig von Mises:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

I fear we are nearing the Mises point of currency collapse. It is likely to be accompanied by societal collapse.

There is no telling how high markets can go from here. Perhaps they can continue to rise for another year or two, but I tend to doubt it.

Two Alternatives

If the Federal Reserve continues to support market levels with continued credit expansion, then markets can continue to rise until a currency crisis causes a collapse. If the Fed stops the credit expansion, markets will likely crash (think 2007 or likely worse). Which is more likely?

I suspect a currency collapse only because kicking the can further down the road (trying to use liquidity to keep markets high) is the political choice of both the Fed and politicians. I feel more confident in predicting their motivation than their success in achieving the goal they aim at. Even with that as their objective, markets could collapse due to governmental ineptness.

What to Do?

Do not think in terms of long-term investing. You must be nimble and quick in your adjustments to unsettled markets. There is no long-term strategy that can protect you.

If you expect a market crash, then the prudent thing to do would be to go to all cash. However, this market can continue to be juiced by liquidity and the currency could collapse. The cash you protected might be worthless or substantially less than the purchasing power necessary to survive.

If you were to stay in the market and you might be able to protect your purchasing power so long as you got out before the collapse.

The only way to deal with this uncertainty is to become a trader focused on the short-term and trends. Momentum signals can allow you to move in and out of equities without emotion. That is what the momentum measures reported on here attempt to do. Other, similar measures might be just as effective.