The Van Tharp Institute

April 04, 2007 — Issue #315

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In this Issue:

Workshops

Blueprint and Peak Performance 101 Back-to-Back

Feature Article

Market Update, by Van K. Tharp

Trading Tip

Directionless Market – Now What?, by D.R. Barton, Jr.

Recommendation

Tax Time for Traders, Here's a Resource You Can Use

Melita's Corner

The Right Attitude, by Melita Hunt

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Feature

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, Confessions of an Economic Hit Man by John Perkins.  To me it totally explains much of the foreign policy of the  U.S. government.  Early in the book, Perkins was told several interesting things:

·    To make grossly inflated predictions of the impact of major industrial projects on the economies of third world countries.  Cheating in the name of “progress” was expected and would be richly rewarded.

·    This would allow these third world countries to get huge loans that they could never repay.

·    The leaders of such countries would become very wealthy, but the countries themselves would become ensnared in a web of debt they could never repay.

·    The large debt would give the  U.S. huge leverage in controlling the political and economic activity of these countries.

·    And the net result would be that the multinational companies could rape the resources of third world companies, getting about 90% of the economic benefit of those resources while a select few in those countries get the other 10%.

Perkins goes on to say that it doesn’t really seem to matter if such leaders are tyrants or democratically elected.  They only need to be willing to enrich themselves at the expense of their people and their countries.  Such leaders who cooperate with Economic Hit Men become very wealthy.  However, when such leaders do not cooperate, the Jackals are sent in and the uncooperative leaders usually meet with strange accidents. He gives examples such as Roldos of Ecuador who died in a plane crash on May 24, 1981 and Omar Torrijos of  Panama who died in a similar accident on July 31, 1981.  Both men refused to enrich themselves at the expense of their respective countries.  Sometimes, uncooperative leaders seem immune to the Jackals, such as Manuel Noriega of  Panama or Saddam Hussein of Iraq .  Whereby there can be the suggestion that  U.S. troops are sent in under the banner of freedom.

I’d like to think that the scenario painted by the book is not true.  But when you look at the people who run the government and their connections with the large firms that profit from huge construction loans, it’s hard not to agree with the conclusions of this well-documented book.

All of this started, and was made possible, by the collapse of Bretton Woods in 1971 which allowed the dollar to remain as the world’s reserve currency while not being tied to gold so that our printing presses could run wild.  And, as I’ve been saying for some time in this commentary, that cannot last for much longer.

Until May’s update, this is Van Tharp. 

About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

Trading Tip 

Directionless Market – Now What?

By D.R. Barton, Jr.

Ever since the big market swoon of February 27, the market has lost its sense of direction.

March was that rarest of beasts – a sideways highly volatile market.  It was lovely for day traders, but for almost all other time frames, it was a real pain in the rear.  The volatility has dropped from its highest level, but is still significant, holding at twice the levels that we saw before  February 27th.

But the market can’t make up its mind on direction, and just keeps scooting sideways. I believe that the big down day jolted the broader public’s perception of a one way market (one way meaning straight up, all the time) and tempered the overwhelming bullish sentiment.

But that bullish bias is still there.  The market ran almost due north from July 2006 until the end of February 2007.  And even though the pullback that started on February 27th was sudden and extreme, it never retraced more than 40% of the July 2006 – Feb 2007 up move.  So in the longer term picture, the bulls are still in control.

But in the intermediate term, a sideways market is the rule of the day.  For the month of March, the market remained range-bound. From the low tick on February 27th, the market has not been able to stretch more than 2 daily ranges to the down side or more than about 3.5 daily ranges to the upside.

With the market stuck in this sideways, but volatile mode, what can we expect? 

The bulls won’t have much to get excited about until the market has a close or two above the February high of 1461.57 in the S&P 500 cash index.  The bears, on the other hand will not have a very strong case until we close below the recent March low of 1363.98.

But there’s clearly a lot of trading to be done between that 98 point range…

For now (4/4/2007), the market’s recent up-thrust has the momentum oscillators pushed to the top of the page (meaning that the markets are overextended to the upside for the near term).  If we are to test the 1460 area, we’ll need to have a minor pullback first.

The risk factors for the downside still seem to outweigh the possibility for a big upside move from here.  Foreign markets are getting back to significantly overbought levels, including the recently thriving Asian markets, which have all eclipsed their February highs.  Perhaps they’ll pull the U.S. markets along with them, but these markets have been so hot for so long that a more significant pullback is looking more likely.  However, this is a development that could take some time to come about.

For now, our models are staying in highly volatile, sideways mode until price moves outside the ranges outlined earlier.  So we’ll sell pushes higher and buy dips until the market tells us its ready to trend one way or the other.

Great Trading!

D. R.

About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world. 

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine.

 

Recommendation

Need Tax Advice?

We often get emails and calls from our clients concerning their taxes.  As all of you know, Van is not an accountant or tax guy and we can’t really answer all of your questions. The best advice that we can give you is to refer you to one company that has specifically been in the business of helping traders with their taxes for close to ten years - Traders Accounting.  

As an active trader, if you are having problems understanding what forms to use and how to file them and if you are interested in finding someone who will get your taxes done correctly and keep you out of trouble with the IRS, then please take the time to visit them and see what they have to offer. 

www.tradersaccounting.com/2006tax  

 

Melita’s Inspirational Corner

The Right Attitude

by Melita Hunt

I woke up this morning in complete overwhelm. It took me quite a while to realize that I was simply not “in the moment.” I was stuck in a myriad of thoughts about all of the things that are on my plate and everything that needs handling since my return from Australia this past weekend. And, the list just kept getting bigger.  It was not a pretty sight to behold and hiding under the sheets wasn’t helping.

Everything seemed so important and needed my attention right NOW! And that’s when it hit me that nothing needed my attention right NOW. All I needed to do in that moment was to be still, breathe, and then get up and get cracking because thinking about it certainly wasn’t getting it done.

I have written about this topic before and my standard way of alleviating “morning brain chatter” is to scribble in a journal and just get it all out; however, this morning even the thought of journaling felt like another task to add to the list.

I could have used the “excuse” of jetlag, but I am a well-seasoned traveler and if there was something especially exciting that I wanted to do, I could circumvent jet lag in a heartbeat. I really just needed to shift my attitude, so I did.

And the absurdity of it all made me laugh.

I have been in this mental state before and the truth is that paperwork, taxes, immigration issues, accounts, dealing with insurance companies, attorneys, emails, appointments etc…  will never be particularly exciting for me, but they are a part of my life, as is “the list.” I just need to be conscious about having the right attitude. 

Realizing that I’m in a mental state that is not favorable or working for me is the first step in shifting out of it, and the only way to do that is to be conscious of myself and to be “in the moment.” Trust me, it makes things look much prettier.

You can contact Melita at mel@iitm.com

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