Tharp's Thoughts Weekly Newsletter

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June 06, 2007 — Issue #324

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Monthly Market Update, by Van Tharp

Trading Education Learn the Tharp Concepts
Trading Tip

Current Market Update, by D.R. Barton, Jr.

Melita's Corner

But We’re Southern Y’All…, by Melita Hunt

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Tharp’s Thoughts

Market Update for June 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 months 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 U.S. stock market indices; 3) our new four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I:  Market Commentary

While the Federal Reserve has not increased interest rates, U.S. interest rates are starting to increase.  The 10 year note went from 4.64% interest on May 8th to 5.06% interest on June 1st.  And five year treasures went from 4.53% to 4.92%.  Interest rates are starting to rise, and I suspect that it is because foreign money coming in to the U.S. is starting to slow down, and we need foreign money to pay our account deficit.

The U.S. debt situation has started to get more public attention.  For example, at the end of May, USA Today announced in bold headlines that the U.S. debt, including future obligations such as social security, amounted to $516,348 per household.  Contrast this with the private debt of $112,043 per household (including mortgages).  It’s not pretty, but it is what the Federal Reserve is dealing with and not telling us about.

In 2006, the Fed stopped publishing M3 data stating that it was meaningless.  Well, the reason they actually stopped is because the U.S. is really printing massive amounts of money to fund our excessive spending and they don’t want the U.S.(or the world) to know how much.  Unofficial estimates have the current growth of money at a 13% annual rate.

This is the climate facing us today.  So what has the market done?

Part II: The 1-2-3 Stock Market Model is in YELLOW LIGHT MODE and that’s good for stocks

We’ve been in yellow light mode since December 29th.  And 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.

Weekly Changes for the Three Major Stock 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%
4-May-07 13,264.62   1,505.62   1,895.70  
11-May-07 13,326.22 0.46% 1,505.85 0.02% 1,898.79 0.16%
18-May-07 13,556.53 1.73% 1,522.75 1.12% 1,896.93 -0.10%
25-May-07 13,507.28 -0.36% 1,515.73 -0.46% 1,889.25 -0.40%
1-Jun-07 13,668.11 1.19% 1,536.34 1.36% 1,928.26 2.06%

As of this writing (Monday June 4th) the market is continuing to rise and the major averages are all doing nicely on the year.  And we had a very significant gain during the last week.  We’ve recovered from the short-term collapse of the Chinese stock market, and Dow has even made new highs.  But will those gains (in fact, can they) continue? I’m very nervous at this point and the portfolio that I manage for IITM is very defensive.

Part III: Our Four Star Inflation-Deflation Model

As I’ve stated many times in these monthly updates, we are in an inflationary bear market.  The bear market is not necessarily reflected in prices but in PE ratios.  PE ratios will continue in a downtrend even though the Dow is making new highs.  And the inflation is obvious, but simply masked by government statistics. 

So now let’s look at the results for the last six months. 

Date

CRB

XLB

Gold

XLF

December 30th

347.89

30.28

513.00

31.67

December 30th ‘05

347.89

30.28

513.00

31.67

October 31st ‘06

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 31st

407.45

37.95

661.75

37.57

April 30th

403.54

38.62

677.00

37.01

May 31st

411.74

40.90

659.10

37.90

We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
October Higher Higher Higher Higher Lower Higher Higher Higher  

 

 

+1

 

+1

 

+1/2

 

-1

+1.5

Gold is actually up significantly since the end of the month, and is now higher than it was two months ago.  See below for the reason.

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 slightly.  Click here to see past issues that explain the model  (HERE).

Incidentally, let me repeat what I said at the beginning of this article.  The Federal Reserve stopped the M3 statistic in June, claiming that it wasn’t useful.  But it shows how much money the Federal Reserve is really printing.  And current estimates for that figure run at 13% annually.

That says there is a huge inflation underlying what is going on.  It hasn’t been reflected in the price of Gold because the European banks have been selling gold to keep the price down and make the markets look more stable.  However, they announced on June 1st that they would not buy any more until September.  This could be a sign for gold to resume its climb.

Part IV: Tracking the Dollar

The U.S. dollar is still looking weak.  It was relatively flat for about six months and then it started a major fall against the Euro, which is still going on.  This is another reason that the Federal Reserve needs to keep rates high. When interest rates are high, people are attracted to the dollar.  But one of the things that’s happening right now is the foreign money is NOT buying the dollar.  This shows in the changes in interest rates that I talked about at the beginning of this update.

The dollar is too risky.  May’s close of 79.20 is the lowest I’ve seen since I’ve been tracking this.  And there is even more serious data.  There has already been a huge drop with  the current June value already at 78.70.

Let's hope it improves before I leave for London!

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
Apr 07 79.87
May 07 79.20

Until the next update, which will be done in late June before I leave for Europe, 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.

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Trading Tip 

Current Market Update

 

By D.R. Barton, Jr.

We’ll continue our series on no-cost Internet resources next week, but for today, the market activity is so interesting that an update in that area would be timely and useful.

This market has had an incredible run up since last fall and, more impressively, since the late February through early March pullback of this year.  From the early March lows to the highs hit on Monday of this week, the Dow gained 14.7%.  That is a huge run-up, especially on the heels of the march upward that began in the second half of July 2006.  I’ve associated this market to the Energizer Bunny – it just keeps going and going (and going).

Perhaps most impressively, the Dow has shown up as overbought in terms of RSI from the middle of April until yesterday (Tuesday, June 5).  Having a six week stretch of being overbought hasn’t happened since December of 2003.  So this is unusual.

As technical analysts know, once something gets overbought and stays overbought for a while, the momentum indicator becomes pretty useless.  About all it tells us is, “Yep, this thing’s strong!”  It can’t really help us with timing anymore.

So one tactic we use to help see past an indicator that’s been pegged to the top of the page is to look at the shorter time frames.  I like to drop down to 30 and 60 minute charts to see what’s happening there.

And for the Dow, it is just now (11:00 am EDT on 6/6) showing up as oversold on the 30 minute chart and is not yet oversold on the 60 minute.

What does this mean?  We could have some more downward action on this move.

When a market is this strong overall, it’s tough to bet that the party’s over.  The best we can do is look for landmarks or decision points that will point us in the direction of the next move.

So for now keep an eye on the 5/24 lows.  If the Dow Industrial cash index can drop say above the 13400 - 13423.90 zone on a closing basis, look for consolidation or move back to test the highs.  If it closes below that zone, then the best bet is for another leg down.  The same zone to watch on the S&P cash index is 1500 -1505.

Next week, we’ll resume our Internet site series.  Until then, keep sending in your favorite sites to drbarton@iitm.com.  And let me know if you’ve found this discussion useful!

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.

 

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Melita’s Inspirational Corner

But We’re Southern Y’All…

by Melita Hunt

 

“We are what we pretend to be, so we must be careful what we pretend to be.” --Kurt Vonnegut, Mother Night, novelist (1922 - 2007)

Now today I am going to head down one particular path, but I need you to stay with me and not take it too personally (especially if you’re from the South) because it’s actually about all of us...

As many of you know, I hail from Australia; therefore, whenever I hear someone in North Carolina tell me that they are a southerner, I joke with them that they don’t even know what being from the south is really about and that I’m far more southern than they will ever be because I’m from way way way down south. Some people chuckle at this; and others are a little offended. I guess it’s because they are very attached to their “southern roots” and whatever that means to them. Some people even use their southern status as a crutch and an excuse…

Let me explain:

There have been two very specific instances that I’d like to share whereby people that I know (southern folk an’ all) have used their southern labeling to excuse themselves for really bad behavior (and yes I called them on it). One was a comment made to me last week about drinking and driving. When I observed and commented that a group of people who had been drinking heavily were heading to their cars to drive home and I said that they shouldn’t, I was told: “Well, that’s just what we do here in the South, it’s a way of life and it’s been a part of our upbringing. everyone does it; we’re fine.”

Huh, wha…? What did they think I would say? “Oh okay, that’s fine then – silly me for questioning you – here’s another beer to keep you from getting thirsty on the road…”

I’d like to be sitting in the court room when they utter their “but we’re Southern your honor” defense after injuring themselves or worse still, someone else.

And the second instance was when a rather large, round and sickly gentleman sat opposite me and gorged down southern fried chicken, home fries and biscuits covered in thick gravy, washed down with a super sized “diet” coke only minutes after telling me how bad his lack of sleep, stomach problems, cholesterol and heart tablets were making him feel. And when I questioned him about it and talked about the higher cost of my health insurance to cover his ailments, his wife and son looked at me mortified and he simply said “I can’t change my eating habits, what do you want me to do? This is what I was raised on; this is what we eat down here in the south. It’s not my fault”

Huh… wha…? Are you kidding me?

I don’t even know where to start with this, and probably just need to get down off my soapbox (or is that my high horse?) but suffice to say, I hope that these stories speak for themselves about how dreadfully sad it is when we honestly and wholeheartedly believe that our “upbringing” or where we come from dictates us and gives us permission to engage in clearly unacceptable bad habits and behaviors that we claim to have no control over. 

To me it is just an excuse for being totally unaccountable and irresponsible, regardless of how you label yourself (Southern, Aussie, Right-Wing, Hippie...the list is endless.)

In this instance, I have picked on the “southern” comments and probably two things that you’ll never engage in yourself, because that is what I experienced this week, but it happens in every culture and every environment, even with some of the small things we do. We blame the ENVIRONMENT instead of being responsible for our own choices.

Where do you excuse yourself with the thought or comment – “that’s just how we do it around here?” Is it empowering or destructive?

I know that I harp on this subject, and I am sure that there are many more layers of beliefs that cause destructive behaviors, but right now, it has just shown me how easy it is for us to make a universally accepted comment and believe that our actions are justified.

So it’s time for me to think about where I do the same, where do I use my “Aussie-ness,” my cultural, or my social or economic upbringing to say “Well that’s just the way we do things around here.”

Nothing comes to mind immediately, so I’ll think about it tomorrow as I sit unprotected in the noon sun...because that is just one of those things that we Aussies do…

(That’s a joke by the way…)

 You can contact Melita at mel@iitm.com

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