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Tharp’s Thoughts
Market Update for April 4, 2007
1-2-3 Model In Yellow Light Mode
by
Van K. Tharp
Look for these monthly updates on the first issue of each month. This allows us to get the closing month’s data. In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book: 1) the 1-2-3 stock market model 2) the five week status on each of the major stock U.S. stock market indices 3) our four star inflation-deflation model, and we’ll be 4) tracking the dollar.
Part I: Market Commentary
Last month I suggested that the market was replete with conflicting information. However, I believe the driving force is that baby boomers are still pouring pension money into the market (which should continue through April 15th), so the market has lots of cash. In addition, the Fed has stopped raising rates (and may even start reducing them in the near future) and many pundits are saying that the market is undervalued at current levels.
In addition, the main driving force of the economy, the housing market, has definitely been stalled by the increases in interest rates. New home sales have dropped dramatically and the sales of existing homes, at least in certain markets, are almost at a standstill. As a result, it wouldn’t surprise me if the Fed didn’t start reducing interest rates fairly soon.
At the same time, I still hear market “gurus” saying that the market is overvalued and due for a major correction at any time now. This might fit with the secular bear market scenario (which I believe) that says valuations (not prices) will continue to go down for the next ten years or more.
This is all the more reason why the best traders just watch the market and act based upon what it is doing right now. And right now the market looks pretty good. Our model portfolio, which I report on in the middle of each month, is currently performing better than it has at any time since we started it. And about 70% of all stocks are still showing a positive efficiency.
Part II: The 1-2-3 Stock Market Model Is in YELLOW LIGHT MODE and That’s Generally Good for Stocks
The market has been in Yellow Light Mode since December 29th. Under Yellow Light Mode, stocks typically go up, although not massively. The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.
Let’s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year. This is given in Table 1.
Table 1: Changes in the Major Stock Market Indices
|
|
Dow 30 |
S&P 500 |
NASDAQ 100 |
|||
|
Date |
Close |
%
Change |
Close |
%Change |
Close |
%
Change |
|
Close 04 |
10,783.01 |
|
1211.12 |
|
1621.12 |
|
|
Close 05 |
10,717.50 |
-0.60% |
1248.29 |
-3.10% |
1645.2 |
1.50% |
|
Close 06 |
12,463.15 |
16.29% |
1,418.30 |
13.62% |
1,756.90 |
6.79% |
|
23-Feb-07 |
12,647.48 |
1.48% |
1,451.19 |
2.32% |
1,839.77 |
4.72% |
|
2-Mar-07 |
12,114.10 |
-4.22% |
1,387.17 |
-4.41% |
1,726.05 |
-6.18% |
|
9-Mar-07 |
12,276.32 |
1.34% |
1,402.84 |
1.13% |
1,744.74 |
1.08% |
|
16-Mar-07 |
12,110.41 |
-1.35% |
1,386.95 |
-1.13% |
1,742.23 |
-0.14% |
|
23-Mar-07 |
12,481.01 |
3.06% |
1,436.11 |
3.54% |
1,794.04 |
2.97% |
|
30-Mar-07 |
12,354.35 |
-1.01% |
1,420.86 |
-1.06% |
1,772.36 |
-1.21% |
Both the NASDAQ 100 and the S&P 500 are up slightly on the year. Last week was a down week, but my guess is the market will continue to rise for the next two months at minimum.
Part III: Our Four Star Inflation-Deflation Model
I strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics.
So far our models have been telling us, that inflation/deflation is pretty steady, with a slight inflationary bias and that’s where secular bear markets tend to start.
So what’s our new indicator telling us about inflation? (To get a description of the inflation model I’m using, click here).
Let’s look at the results for the last six months.
Table 2: Our Four Star Inflation-Deflation Model
|
Date |
CRB |
XLB |
Gold |
XLF |
|
December
30th |
347.89 |
30.28 |
513.00 |
31.67 |
|
August 31st |
390.95 |
32.19 |
623.50 |
33.52 |
|
September
30th |
379.10 |
31.82 |
599.25 |
34.62 |
|
October
31st |
383.92 |
33.33 |
603.75 |
35.43 |
|
November
30th |
408.79 |
35.00 |
646.70 |
35.68 |
|
December
29th |
394.89 |
34.84 |
635.70 |
36.74 |
|
January
31st |
393.89 |
36.25 |
650.50 |
37.08 |
|
February
28th |
410.64 |
37.45 |
664.20 |
35.95 |
|
March
30th |
407.45 |
37.95 |
661.75 |
37.57 |
We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.
Table 3: Our Two Month and Six Month Changes
|
Date |
CRB2 |
CRB6 |
XLB2 |
XLB6 |
Gold2 |
Gold6 |
XLF2 |
XLF6 |
Total
Score |
|
October |
Higher |
Higher |
Higher |
Higher |
Higher |
Higher |
Higher |
Higher |
|
|
|
|
+1 |
|
+1 |
|
+1 |
|
-1 |
+2.0 |
The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom. The model once again shows that inflation is winning.
Part IV: Tracking the Dollar
The U.S. dollar is staying relatively flat as shown by the data below in Table 4 and Figure 1.
Table 4: Tracking the Dollar
|
The Dollar Index |
|
|
Month |
Dollar Index |
|
Jan
05 |
81.06 |
|
Jan
06 |
84.29 |
|
Feb
06 |
85.05 |
|
Mar
06 |
85.01 |
|
Apr
06 |
83.88 |
|
May
06 |
80.63 |
|
June
06 |
81.51 |
|
July
06 |
81.94 |
|
Aug
06 |
81.18 |
|
Sep
06 |
81.59 |
|
Oct
06 |
82.36 |
|
Nov
06 |
81.49 |
|
Dec
06 |
80.89 |
|
Jan
07 |
82.37 |
|
Feb
07 |
82.07 |
|
Mar
07 |
81.23 |
Figure 1 shows that the dollar saw a dramatic fall starting in 2002, but that it’s been rather flat over the past several years.
Figure One: The Dollar Index
I just finished reading a rather amazing book,