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Tharp's Thoughts Weekly Newsletter

March 05, 2008 — Issue #362
  
Discount

ETF 101 and Systems Development, North Carolina

Article

Market Update for March 2008, 1-2-3 Model in Red Light Mode by Van K. Tharp, Ph.D.

Workshops

Seats Still Available in Singapore/Australia & Our Upcoming Events

Trading Tip

Lessons from a Money Mosh Pit by D.R. Barton, Jr.

Special

How to Develop a Winning Trading System Home Study Program

Melita's Corner

Those Were the Days by Melita Hunt

Workshop

ETF and System Development Workshop

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Excel and XLQ Programming  April 1

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Feature

Tharp’s Thoughts

Market Update for March 2008

1-2-3 Model in Red Light Mode

by Van K. Tharp, Ph.D.

I’d like to make a comment about these monthly updates that I have been doing ever since Safe Strategies for Financial Freedom was released in 2004.  First, these updates reflect my beliefs.  If my beliefs and your beliefs are not the same, then you will not find them useful. 

Second, I continue to do them because they are useful for me and my trading.  And I hope they are useful to those of you who like to be updated and appreciate the information that follows.  However, as I said above, if your beliefs are not similar to mine, then they are probably not useful at all.  Thus, if you are inclined to do some sort of intellectual exercise to prove one of my beliefs wrong, simply remember that everyone can  find lots of evidence to support their beliefs and refute others.  Just know that I admit that these are my beliefs and that your beliefs might be different.

These monthly updates are published in the first issue of Tharp’s Thoughts each month and are based on the closing month’s data.  These updates cover 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 4) U.S. dollar tracking; plus one new thing that wasn’t in the book, 5) the five strongest and weakest areas of the overall market.

Part I:  Market Commentary

The subprime crisis continues to exert itself on the markets worldwide and, in my opinion, we are probably beginning to see the second downleg of the secular bear market.  This one could be very nasty.  We definitely seem to have a strong inflationary environment and a bear market in such an environment can be nasty indeed. 

Last month, I showed that with real inflation and the decrease in the value of the dollar, you needed to make 20% on your investments just to break even.  Gold did this and stock markets in countries like  China,  India, and  Brazil did much better.  However, even they are affected by the subprime crisis because when a lot of assets are suddenly worthless, other assets need to be sold to maintain some liquidity and, in my opinion, this is what the markets are facing right now.

Part II: The 1-2-3 Stock Market Model Is in RED LIGHT MODE and That’s Bad for Stocks

The 1-2-3 Model is clearly in a red light mode and that’s not good for the stock market.  The Fed is not in the way and has actually started to lower interest rates.  That’s positive.  The market is acting poorly and the PE ratio of the S&P 500 is above 17, both of which are negative. Thus, we are in red 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.  These data are given in the table below.  Notice that the market has now undone, in two months, all of the gains made in 2007.

The market has also returned to more normal volatility.  I keep getting questions from the media on what investors should do with this high market volatility.  But my research showed that over many years the S&P 500 made weekly changes of over 2%.  Then during the last upward phase, we had very quiet markets.  But now that the markets are moving back to normal ranges, people are anchored by the recent past and think that these are volatile markets.

What’s really going on?  I personally think that a lot of financial institutions are in big trouble because of the subprime crisis and they must sell whatever they can to get cash, and that includes many of the best investments for this particular period of time.  When they run out of assets to sell, then things will return to a more normal inflationary bear market scenario.  But these are huge institutions.  We may see some banks crashing before it is over, and I’m not the first person to say that.

When we look at the strongest and weakest areas of the markets, it seems to be mostly commodities, with even the strongest country ETFs taking big hits.

The five strongest components, in order:

1)  Oil (86)

2)  Commodities (85)

3)  Gold (77)

4)  Taiwan (75)

5)  Brazil (74)

The five weakest components, in order:

1)  Hong Kong (13)

2)  NASDAQ (16)

3)  Singapore (20)  -- this is where I am as I’m writing this.

4)  Malaysia (23)

5)  China (23)

Remember when the Chinese stock market led the list for much of last year?  Also notice that while Gold is very strong, gold stocks are not.  But I think this is due to the liquidity problem produced by the subprime crisis.

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 when the Dow makes new highs.  And the inflation is obvious, but simply masked by government statistics.  Okay, so now let’s look at the results for the last six months.  And remember that the Fed has now chosen to produce inflation and a strong dollar devaluation over the pain of the subprime crisis.

Date

CRB

XLB

Gold

XLF

Dec-05

347.89

30.28

513

31.67

Dec-06

394.89

34.84

635.5

36.74

Jul-07

424.52

39.42

665.5

32.9

Aug-07

413.49

39.15

672

33.75

Sep-07

447.57

42.11

743

34.32

Oct-07

453.26

43.86

789.5

33.73

Nov-07

451.26

41.65

783.5

31

Dec-07

476.08

41.7

833.3

28.9

Jan-08

503.27

38.62

923.2

29.14

Feb-08

565.65

40.87

971.50

25.83

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

CRB 2

CRB 6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

 

Higher

Higher

Lower

Higher

Higher

Higher

Lower

Lower

 

 

 

+1

 

+1/2

 

+1

 

+1

+3.5

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 for more information on the model.

As of this writing, Gold is now at $971 per ounce (a tremendous increase even since last month).  In addition, the CRB is also hitting new highs.  Incidentally, the figure I’ve been using for the CRB index is the CCI (the old CRB), which is a much more accurate representation of the commodity market.  I have been using this index for some time.

This is a time to be in commodities and real assets, such as precious metals, and top quality collectables such as rare stamps, which we’ve talked about previously in this newsletter.  If you know where to look, you may find the beginnings of real estate bargains.  Commodity and gold stocks are probably good value plays because they are going down as big institutions must liquidate some of their best investments.  Many gold stocks have been down for months while gold keeps setting new highs.  And gold stocks are really leveraged gold plays since they value gold at much less than the current price of their assets.

I’m also going to include the latest publicly available statistics on inflation from John Williams (www.shadowstats.com).  According to Williams, inflation is running at over 11% and M3 (another measure) is running at over 15%.

Part IV: Tracking the Dollar

With the Federal Reserve lowering interest rates, I expect the dollar to be really weak now.  Who wants to buy treasury bills as the interest rate gets lower and lower?  So expect currency traders to start selling the dollar and moving to currencies that pay a better interest rate.  Look at the data in the chart because it really says it all.

Month 

Dollar Index 

Jan 05 

81.06 

Jan 06 

84.29 

Jan 07 

82.37 

 Feb 07 

82.07 

Mar 07 

81.23 

Apr 07

79.87

May 07

79.20

Jun 07

78.93

July 07

77.51

Aug 07

77.51

Sep 07

75.91

Oct 07

73.93

Nov 07

72.94

Dec 07      

73.69

Jan 08

73.06

Feb 08

72.57

I’m currently on a world tour.  Last time I was in Singapore, which really likes to keep their currency fairly even with the US dollar, a US dollar was worth over $1.60 Singapore.  Now it’s worth less than $1.40.  And costs, especially for Americans, have gone up dramatically here.

Always remember that crisis means opportunity.  Shorting the NASDAQ could be a good long term move, while being long gold, commodities, and oil has been very profitable.  However, you need to always be aware of “What is the market doing right now?” – rather than what was it doing last week.

Until next month’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 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.

Workshop Schedule

Seats are still available in all workshops listed below

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Highest Quality in the Field

How to Develop a Winning Trading System March 7-9 Singapore

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Blue Print for Trading Success March 14-16 Sydney, Australia
How to Develop a Winning Trading System March 28-30 Sydney, Australia
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ETF and Mutual Fund Techniques 101 March 29-31 Cary, North Carolina, USA
Excel and XLQ Programming (one-day) April 1 Cary, North Carolina, USA
How to Develop a Winning Trading System April 4-6 Cary, North Carolina, USA
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Peak Performance 101 April 19-21 Cary, North Carolina, USA
Peak Performance 202 April 23-25 Cary, North Carolina, USA
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Advanced ETF 202 May 17-19 Cary, North Carolina, USA
Excel and XLQ Programming (one-day) May 20 Cary, North Carolina, USA
Blue Print for Trading Success May 21-23 Cary, North Carolina, USA

 

Click Here for More Details

 

Trading Tip

Lessons from a Money Mosh Pit

by D.R. Barton, Jr.

“Other people may be there to help us, teach us, guide us along our path, but the lesson to be learned is always ours.”  --unknown

Have you ever noticed that trading lessons show up in all sorts of places?  I have stumbled upon them while playing golf, while both playing and watching poker, and while teaching economics to third graders.  I have found another good one in a much more traditional setting.

I played a most interesting money game this week.  I’m at a fairly large conference (~300 people) that is focused on growing businesses.  It involves some modeling of other business leaders and some pretty deep personal work.

But the interesting game came when the whole group was told to bring money to a game after the next break.  Rather quickly, everyone was put into what was basically a mosh pit.  The leader gave no instructions except to say “Take responsibility for your money.”  Loud music was then turned up and the instruction to “pass your money” was given.

Money was changing hands rapidly all around me and the social pressure to “pass” was pretty intense.  When a large wad of cash came my way, it was fairly easy to “pass” my lesser amount of money for that. 

Then, a weird thing happened.  Amid widening calls from the crowd to “Pass! Pass!,” money kept changing hands and someone snatched the wad from my hand without passing anything back.  My great trade had gone terribly bad in an instant.

I was now enlightened to the rules (or lack thereof) of the game – this was basically a free-for-all.

Without boring you with details, over the next minute or two, I was able to pull out a single dollar and make a “legitimate pass” (at least in my mind) for a much larger bill.  And then I made no more passes.  I later had time to reflect some lessons for traders and investors.

Lessons from Anarchy

I won’t spoil the rest of the game and the debrief that followed in case anyone else gets to play a similar game in the future, but I will share some of the lessons as they relate to trading.

First and foremost: If you don’t understand the game – don’t put your money at risk.  This one is sort of obvious, but sometimes it sneaks up on us in subtle ways.  Many folks jump into trading with minimal knowledge of how the game is really played.  And even experienced investors can be tempted to try a new game (options, forex, spreads, etc.) without getting a working knowledge of the game.  Worse yet, many have invested in businesses and other “opportunities” without really knowing the “ins and outs” of the game.

Have a plan.  The game I played at the conference was designed to make people act without thinking.  Loud music, peer pressure and time pressure were all applied.  This can happen to traders in other ways.  An unexpected news announcement comes out and you try to play the market response, even though it’s not part of your plan.  Or someone presents a great investment opportunity, and you’re tempted to jump in so you don’t "miss the boat."  Always have a plan, and especially an exit strategy before jumping into any thing new.

Be wary of blindly following the crowd.  Peer pressure, both direct (following your friends and colleagues) and indirect (following the crowd) is a powerful thing.  While jumping on the bandwagon can occasionally pay off in the short term,  it’s a pretty weak plan for the long run.  The greater the fervor and excitement around an idea, the higher the probability that the hype is nearing the end of its run.  The “magazine cover indicator” is research-proven evidence of this.  Don’t jump onto a trend just because everyone else is doing it.  Do your research to see if the trend is sustainable.  And if it is, look for prudent places to enter (short-term pullbacks, etc.).

Trading and investing lessons surround us.  And many point back to time-tested principals – have a plan, know your exit before you enter and make sure you know the game you’re playing.

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.  He is a regularly featured guest on both Report on Business TV,  and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”. 

 

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Melita's Inspirational Corner

Those Were the Days

by Melita Hunt

As I lay in the backyard yesterday, enjoying the sun, I heard the ice cream truck (known as Mr. Whippy in Australia) traveling along our street playing a familiar tune to attract the local children: “Those were the days my friend. We thought they’d never end, we’d sing and dance forever and a day. We'd live the life we'd choose. We'd fight and never lose. Those were the days. Oh yes, those were the days.” La la la la la la, etc…

Do you know the song. Did it get you singing?

It, of course, got me singing along, although I must admit that I only know the chorus, and it also got me thinking about those very lyrics. What days? And were they really THE days? 

So I started to look back at my life. I only have four decades of living to reminisce about at this particular juncture, but they have been very active, fulfilling and busy years. I look back on most of them fondly, even though I know that it wasn’t and hasn’t been a smooth ride. 

I thought of my childhood, my teens, my twenties and my thirties and the incredible ups and downs during each of those decades. And which particular times would I say “Those were the days.”? I guess that the answer would be all of them, for one reason or another. 

It also reminded me that every day we are making “those days” right now, every minute. We will look back at these very times in years to come and declare “those were the days.” This will be especially true if we fill our moments with singing, dancing, living the life we choose and pursuing our passions and dreams. 

There is no rule that the ride is going to be easy or smooth; in fact, sometimes the times that we perceive as rough and more difficult are the ones that we look back on and treasure the most because of the awakenings and knowledge that we gained during those times. 

So when I hear folks say things such as “It wasn’t like that when I was young,” I take it with a grain of salt. Of course times have changed, just as they will continue to change for generations to come. We can pick good and bad moments in history going back for centuries. It is really just a figure of speech, and it will continue to be repeated by generations of families as they continue to echo the sentiments of their parents and grandparents. 

And in the same vein, everyone will have their own version of “those were the days.”

So I’ll leave you with a reminder that I read every morning in my mother’s guest bathroom: 

“Do not look back and grieve over the past, for it is gone. And do not be troubled about the future, for it is to come. But live each day and make it so beautiful that it is worth remembering forever. “

Because THESE are the days my friend…

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 (she is a never-smoker). Please feel free to read her blog at www.myleftlung.com.

You can contact Melita at mel@iitm.com

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