Home   Workshops    Products    Contact Us

View this newsletter on-line, or read back issues

   

Tharp's Thoughts Weekly Newsletter

November 14, 2007 — Issue #347
  
Article

What’s Happening in Today’s Market by Van K. Tharp Ph.D.

Trading Tip

Volatility Returns by D.R. Barton, Jr. 

Education

The Ultimate Home Study Course for Traders

Melita's Corner

One Day by Melita Hunt

Feature

Tharp’s Thoughts

What’s Happening in Today’s Market

by

Van K. Tharp, Ph.D.

If you are actively trading, you can’t help but notice what happened during the last three trading days through November 12th.  Almost everything that was going up crashed.  Here are a few examples:

Gold, which closed in London at $841 on November 11th, dropped about 5%.  Gold stocks, which did not respond strongly to the gold run-up, plummeted.  For example, Seabridge Gold (SA), which had hit a high of $38.20 on Oct 26th (not in alignment with the high in gold), closed at $28 on November 12th.  That’s a plunge of 26.7% -- hitting 25% trailing stops.

High Tech flyers were equally hit.  Let’s look at Apple, Google, and Research in Motion:

·        AAPL went from a high of $192.68 on November 7th to a low of $150.63 on November 12th.  That’s a fall of 21.8% in just a few trading days.

·        GOOG went from a high of $747.24 on November 7th to a low of $626.21 on November 12th.  That’s a drop of 16.2%.

·        RIMM went from a high of $137.01 on November 7th to a low of $100.01 on November 12th.  That’s a fall of 27%, which also hit trailing stops of 25% within a few days.

Gold stocks and high tech flyers would not seem to be correlated, but they have been.  So what else has been affected and why?  What about hot countries?

The Chinese stock market has been the hottest stock market in the world.  PGJ, which best reflects the Chinese market, went from a high of $38.85 on October 31st to a low of $30.18 on November 12th.  That’s a drop of 22.3%.  And one of the hottest Chinese stocks, China Mobil (CHL), went from a high of $104 on October 29th to a low of $80.49 on November 12th.  That’s a drop of 22.6%.

Even Brazil (EWZ), which has been one of the hottest countries, went from a high of $87.67 on November 8th to a low of $75.65 on November 12th.  That’s a drop of 13.7% in three trading days.

OK, so now we have drops in two of the strongest countries, gold and gold stocks, and high tech stocks.  What about other stocks that have been performing well but are not necessarily high flyers?  And, what about interest rate sensitive stocks?  NLY went from a high of $17.8 on October 29th to a low of $16.44 on November 12th.  While the drop is just over a dollar, it is still a 7.6% drop. 

So what’s going on?  You only have to go back a few months to figure it out.  From mid-July through mid-August we had a fall of about 10% in the global markets.  The media was screaming doom and gloom but the markets recovered.  And I believe the reason for the fall still exists.  It’s the global credit crunch from the sub-prime crisis.

Wall Street banks are facing the prospect of altering the valuations of their holdings due to the sub-prime crisis.  And this week, based upon new accounting rules, they might have to write down valuations as much as $500 billion.  This means Citigroup, Goldman Sachs, Morgan Stanley and other US banks are now compelled to decrease the value of their assets at market prices and take off huge writedowns.  

The new rule from the US Financial Accounting Standards Board - known as FASB regulation 157 - comes into effect on Thursday November 15th.  The new rule affects those assets that banks have been valuing according to their own in-house rules.  These are called “Level 3” assets.  The top six U.S. banks have $365 billion in such assets.  A Goldman Sachs spokesman said the rules had compelled them to place quality assets in the Level 3 category that are not at risk in any way.

What are these assets worth?  Well, right now there are $1.2 trillion in U.S. sub-prime mortgage securities. An index of such assets shows that the lowest grades of 2006 vintage debt are worthless, and BBB grades are down to just 18 cents on the dollar. AA grades are trading at around 60 cents, and AAA grades are near 85 cents.  These are probably much lower than they should be, but it just goes to show what happens in a crisis.  When you are in trouble, you can only unload your assets at firesale prices!

The world wide exposure to collateralized debt obligations is estimated to be about $3 trillion and all of it is in trouble.  Merrill Lynch has declared a 30% writedown on its holding of CDOs, offering a glimpse into the true values.  However, few international banks will admit to any losses on the scale suggested by market prices.  For example, UBS is booking its US mortgage debt at 90 cents on the dollar.

For many of these banks, their level 3 assets are much bigger than their tangible equity.  Here are just a few examples:

  • Citigroup has $128b of assets in this category, or 205% of its tangible equity. 
  • Morgan Stanley $88b (275% of tangible equity). 
  • Goldman Sachs $72b (212% of tangible equity).  
  • Lehman Brothers $35b (194% of tangible equity).

My guess is that the meltdown in global assets is a reflection of this crisis.  Banks are liquidating as much as they can to stave off a crisis.  Thus, everything is impacted, especially the best investments.  And the liquidation is causing other asset managers who see the sell off and then sell to protect their assets.  And at some point all that’s left is the people who buy and hold.  That’s fine if the sell off is only temporary as it was in July.  But what if it turns into the second major downleg of the secular bear market?  What will you do?

So What Does this Mean for Your Trading?

Nasty things happen during secular bear markets, such as the one we have been in since 2000, and you must be prepared for them.  The sub-prime crisis is just one example.  The sub-prime crisis will play itself out in mini-crashes like this one until it’s over or governments decide to bail out the big banks.  The latter, if it happens, will simply delay the impact of the crisis for a while.  As mentioned above we have a $1.2 trillion dollar problem here in the US, and a $3 trillion dollar problem worldwide, and that could have a major impact on global markets for some time to come.

If you are trading, you need to be aware of these factors.  If you are trading short term, you can simply profit from the money flows, but position trading in this market climate could be very dangerous.  And as the examples above show, even large 25% trailing stops will not necessarily be enough to protect you.  And do you really want your asset values to drop 25% or more?

Certain assets should be exempt from this crisis long term.  I would guess those to be tangible assets such as gold, silver and commodities.  However, outright ownership of these assets will protect you.  Leveraged ownership of these same assets could bankrupt you during the crisis because people will be selling off every form of asset that they can to protect themselves.

Will It End?

US mortgage companies are still doing sub-prime lending.  People with terrible credit scores can still get loans.  The only difference is that banks will probably not try to mask them as high-quality loans.  You’ll know what you’ve got with a sub-prime loan.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling book Trade Your Way to Financial Freedom 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

Volatility Returns

by D.R. Barton, Jr.

Last Wednesday (Nov 7), the Dow plummeted 360 points.  After sliding down for another three days, it pops up 330 points on 11/13.

Reading the “reasons” why these swings happens is an endless source of humor and a depiction of the very worst that journalism has to offer.  Last Wednesday, the markets were said to be spooked by the credit markets as Citibank made their write-offs.  Yesterday – I kid you not – I read a synopsis that said the markets had such a strong day because “participants had put the mortgage crisis in the rear-view mirror.” Amazing!  Yet I digress.

The one thing that I know as fact is that huge volatility has returned to the markets.  Daily ranges are approaching magnitudes of the July volatility expansion.  At the current level of volatility, only July 2007 has had higher figures in the last five years!

Day traders love the increased opportunity and longer moves afforded by the volatile days.  There have been days when (like last Friday) long sustained moves occurred on both sides of the markets – giving plenty of chances for participation in the moves.

But these big moves on the daily charts can wreak havoc on swing trading and longer time frames.  Longer term stops are being hit just as stocks are starting to take off.  The Nasdaq has been hit particularly hard, showing a 12 % pullback in just a week.

What Is a Reasonable Game Plan?

For day traders:  Make hay while the sun is shining!  These expanded ranges are what day traders dream about.  Make sure that you’ve adjusted your profit-taking exits to take advantage of the bigger moves.

For swing traders:  If your strategy does not have a component to adjust for volatility, these are probably particularly difficult markets.  If your approach is getting chopped up, it might be best to stand aside for a week or so.  Even if your system adjusts for volatility, chances are it doesn’t do it quickly enough to keep up with extreme movement like we’ve seen in the past week.  Again, standing aside is fine (and is one of the advantages individual traders have – the ability to be “out of the market”).

For options traders:  Make sure that you’re not over-paying for premium.  When volatility expands rapidly, options models really punish those who are buying puts and calls (in order to protect those who are selling).  Volatility capturing strategies are particularly useful now.  It is very reasonable to assume that after this rapid increase in volatility, that volatility will contract once again in due course.

For longer-term traders:  The volatility expansion has accompanied a fairly steep pullback in the markets – over 7% for the S&P 500 cash index and almost 12% in the Nasdaq.  New long-term positions must be given wide stops to get outside of “market noise” so be sure to adjust position size accordingly.

Volatility, like the ocean tides, changes with regularity.  Just make sure to respect the power of these changes.

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. You may contact D.R. at drbarton@iitm.com.

 

Trading Education

Peak Performance Home Study

The Ultimate Home Study Course for Traders. How you think when you make and lose money. Stress reduction. How not to repeat your mistakes. Trading unemotionally. Contains five books and four CDs.

Order Now

Melita's Inspirational Corner

One Day

by Melita Hunt

I am an Aussie and on the majority of occasions, when the subject of my nationality comes out, the following phrase is one that I hear time and time again coming out of people’s mouths regardless of their ages: 

Oh I love Australia, I am going to visit there “one day.” 

If I’ve heard it once, I’ve heard it a thousand times. Australia always seems to be one of those places that evokes travel dreams and my simple question is "Does that “one day” actually ever happen for most people?"

I’m going to quit my job and do something I love “one day.”

“One day” I’ll finally have time to play golf regularly.

We’re going to retire and travel the world “one day.”

I’ll be full time trader “one day.”

It’s seems that a lot of people have the “onedayitis” ailment. Do you?

Is there one thing that you constantly say “I’ll do that one day” and yet that day never seems to eventuate? And is it about commitment (or lack thereof), clarity, fear or just plain old procrastination? 

What is your “one day”? How long have you been saying it or dreaming it? And how concrete is it really?

My “onedayitis” has never been about travel or adventure. I will take off on a moment’s notice and readily scuba dive, jump out of planes, camp out under the stars or dine at a five star restaurant – simply because I want to. My “onedayitis” is much more personal. It has always revolved around actually sitting down and getting my first adult book written, edited and published. It has been on the cards for as long as I can remember and by now I could have had ten books if I had just started writing on that “one day.” I have also analyzed it upside down and inside out wondering about the cause of it all: Is it fear of failure? Fear of success? Or just plain old self sabotage? Who knows? And who really cares? The fact is the “one day” hasn’t happened yet.

Now I really find myself in a position of wondering how many “one days” there actually are. My energy is considerably lower because of the cancer treatment so if I am going to do it, then I guess I had better start the process now or I may find myself in a position where I can’t do it at all.

I encourage you to do the same.

Is there a place that you really and truly want to visit or something that you really want to do but you just keep putting it off without any rhyme or reason? Are you an Australian or New Zealand “future” visitor?

Well what about making your “one day” yearnings happen TODAY?

Opportunities that are available to you right now may not be around forever.

So go ahead and take the plunge. Book the trip, set the plan in motion, make the commitment, surprise your loved ones and then instead of saying “I’ll do that one day” – you’ll get to join the elite few of us that regularly say “Yeah, I’ve been there and done that already.”

Melita Hunt is the CEO of the Van Tharp Institute. If you would like to keep up with Melita’s progress regarding her recently diagnosed lung cancer. Please feel free to read her blog at www.myleftlung.com.

You can contact Melita at mel@iitm.com

Feedback

Feedback to Dr. Tharp and the Van Tharp Institute

Everything that we do here at the Van Tharp Institute is to help you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative!

Feel free to click below to leave us any comments so that we can serve you better.

Click Here for Feedback Form

 

Do Not Reply to this email using the reply button as the email address is not monitored, your email will not be seen. Please click this link to contact us: suggestions@iitm.com

The Van Tharp Institute does not support spamming in any way, shape or form. This is a subscription based newsletter.

If you no longer wish to subscribe, Unsubscribe Here

To change your e-mail Address, click here

Or, paste this address in your browser: http://www.iitm.com/privacy_policy.htm

 

The Van Tharp Institute
102-A Commonwealth Court, Cary, NC 27511 USA
800-385-4486 * 919-466-0043 *  Fax 919-466-0408

Back to top

Copyright 2007 the International Institute of Trading Mastery, Inc.

.

.

.

...

.

Quote:

"I don't suffer from insanity; I enjoy every minute of it." ~Unknown

.

.

 

.

.

.

 

.

.

.

 

.

.

.

.

..


Trade Your Way to Financial Freedom

.

.

.

.

.

..

.

Back to top

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

Back to top

.

.

.

.

.

.

.

.

.

.

.

.

.

.

~

~~~~~

Click here to see our
Workshop Schedule

 

.Back to top

~

~

~

~

 

Free Downloads

Handbook for Traders and Investors

Workshop Syllabus

 

~

~

~~

~

Free Trading Simulation Game

A computerized version of Van's famous "marble game."

It is designed to teach you the important principles of proper position sizing.

Download the 1st three levels of the game for free. Register now.

~

.

.

.

.

.

Check out Dr. Tharp's Blog:

smarttraderblog.com  

~

.

.

~

Tharp Concepts Explained...

 

- Psychology of Trading

- System Development

- Risk and R-Multiples

- Position Sizing

- Expectancy

- Business Planning

Learn the concepts...

~.

.

.

.

.

.

.

~

Share this newsletter with a friend!

~

~

~

~

~~