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Tharp's Thoughts Weekly Newsletter

June 04, 2008 — Issue #375  
  
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Article

Market Update for May 2008: Volatile Bull by Van K. Tharp, PhD

Trading Education

Van Tharp's Basic Trader Program Offers 30% off Van's Key Material

Trading Tip

Oil and Gas – Crudely Speaking Part III by D.R. Barton

Melita's Corner

Always Something to Do by Melita Hunt

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Feature

Tharp’s Thought

Market Update for May 2008

Market Condition: Volatile Bull

by
Van K. Tharp

 

I always say that people do not trade the markets, they trade their beliefs about the markets. In that same way I'd like to just point out that these updates reflect my beliefs. If my beliefs and your beliefs are not the same, then you may not find them useful.  I find the market update information useful for my trading, so I do the work each month and I'm happy to share that information with my readers. 

However, if your beliefs are not similar to mine, then the information may not be useful to you. Thus, if you are inclined to do some sort of intellectual exercise to prove one of my beliefs wrong, simply remember that everyone can usually find lots of evidence to support their beliefs and refute others. Just simply know that I admit that these are my beliefs and that your beliefs might be different.

These monthly updates are in the first issue of Tharp’s Thoughts each month. This allows us to get the closing month’s data. These updates cover 1) the market condition (mentioned in the April 30 edition of Tharp’s Thoughts), 2) the five week status on each of the major stock U.S. stock market indices, 3) our four star inflation-deflation model, 4) tracking the dollar, and 5) the five strongest and weakest areas of the overall market.

Part I:  Market Commentary

Once again I want to encourage you to read The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free by Ellen Brown, JD.   I talked about it extensively in last month’s update. 

According to Brown, even our political process was created by huge money interests so that people would be distracted over politicians who quarreled over issues that were insignificant to what the “debt slave owners” were doing.  Notice the main issues that McCain and Obama talk about and how the media picks up on them:

·        How Hillary is insensitive because she referred to the RFK assassination in June.

·        McCain and Obama fighting over veteran’s rights.

·        McCain criticizing Obama because he says he would talk to the leaders in Iran, Cuba , etc. and that must mean he’s soft on terrorists or something like that.

·        Obama saying we need to shake up the beauracracy in  Washington and get them out of town.

We have a bankrupt country that is trillions in debt. Savings among Americans are negative, which has not occurred since the Great Depression.  We are having record numbers of mortgage foreclosures as people lose their homes.   And all of this relates to the Web of Debt problem.   But our political process, as it was intended, and created, to do, is totally ignoring the main problem.

So with that said, let’s get on with the market commentary.

Part II: The Current Stock Market Type Is Volatile Bull (but only for one week so it could easily move back to Volatile Sideways)

I have now substituted my new market type for the 1-2-3 model.  The reason I’ve done that is because as soon as the 1-2-3 model goes below a certain PE ratio (which it is poised to do) another component will turn bullish.   However, I expect us to be in a secular bear market until the PE ratios of the S&P 500 reach single digits.  Thus, the 1-2-3 model doesn’t really fit my current beliefs. 

Last month, I started a new measurement of market type based upon rolling 13 week windows for market direction and the average weekly change over the last seven weeks for market volatility.   I made two mistakes, which we corrected the next week, in that I forgot to tell you that I measure market volatility as the average (absolute value) weekly change over the last seven weeks.   Also the date was wrong (it was giving Monday’s date but the weeks closing price on Friday).  All of that is corrected and up- to-date for the entire year in the table below.
Market Condition Date
Volatile Bull 5/31/2008
Volatile Sideways 5/23/2008
Volatile Sideways 5/16/2008
Volatile Sideways 5/9/2008
Volatile Bull 5/2/2008
Volatile Sideways 4/25/2008
Volatile Sideways 4/18/2008
Volatile Sideways 4/11/2008
Volatile Sideways 4/4/2008
Quiet Bear 3/28/2008
Volatile Bear 3/21/2008
Volatile Bear 3/14/2008
Volatile Bear 3/7/2008
Volatile Bear 2/29/2008
Volatile Bear 2/23/2008
Volatile Bear 2/15/2008
Volatile Bear 2/8/2008
Volatile Sideways 2/1/2008
Volatile Bear 1/26/2008
Volatile Bear 1/18/2008
Volatile Bear 1/11/2008
Volatile Bear 1/4/2008
Quiet Sideways 12/28/2007

You’ll notice that basically every week of 2008 is volatile (with two exceptions)  However, we’ve moved from generally bearish to sideways with an occasional volatile bull period – and perhaps that is now coming.

Let’s look at what the market has done during the month of May.

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

 

1,211.12

 

1,621.12

 

Close 05

10,717.50

-0.60%

1,248.29

3.10%

1,645.20

1.50%

Close 06

12,463.15

16.29%

1,418.30

13.62%

1,756.90

6.79%

Close 07

13,264.82

6.43%

1,468.36

3.53%

2,084.93

18.67%

01-May-08

13,010.00

 

1,409.34

 

1,980.44

 

08-May-08

12,866.78

-1.10%

1,397.68

-0.83%

1,966.86

-0.69%

15-May-08

12,992.66

0.98%

1,423.57

1.85%

2,031.34

3.28%

22-May-08

12,625.62

-2.82%

1,394.35

-2.05%

1,964.92

-3.27%

30-May-08

12,638.32

0.10%

1,400.38

0.43%

2,032.57

3.44%

Year to Date

12,638.32

-4.96%

1,400.38

-4.85%

2,032.57

-2.58%

All three major indices are still down for the year, but only slightly.  Also notice that the NASDAQ has had three weekly movements more extreme than plus or minus 2.5%, the DOW has had one, while the S&P 500 has only had one weekly change with an absolute value greater than 2%.   Generally, the market is becoming quieter even though it still shows up as volatile.

I’m also listing the strongest and weakest areas of the market in this update. The ratings give the most weight to what has happened recently so they can sometimes change rapidly.   In addition, I have trouble listing an area as being strong when it is actually down in price over the last 40 weeks.  Thus, I plan to only list the strongest areas that are also up over the last 40 weeks.  The relative strength of each component is given in parenthesis. 

Part III:   The Strongest and Weakest Market Components

Five strongest components, in order:

1)  Brazil (88)  - Brazil was the strongest last week and has remained so.

2)  Latin America (78) -  Another giant is resuming its uptrend. 

3)  Mexico (71) - Latin America is strong as are two of its components,  Brazil and  Mexico.  

4) Oil (70) – Oil is one of the big winners on the year and still looks strong.  

Other strong components are big cap growth companies (QQQQ), midcap growth companies (IJK) and Canada (EWC).   This is the first time that  U.S. stocks components have surfaced at all for a long time. 

Five weakest components are:

1)     India (9)  -- India was strong last month and has had a major correction down.

2)     Belgium (25)

3)     LT Treasuries (25)

4)     Corporate Bonds (26)

5)     Malaysia (27)

Part IV: 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/CCI

XLB

Gold

XLF

Dec-05

347.89

30.28

513

31.67

Dec-06

394.89

34.84

635.5

36.74

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

Mar 08

525.25

40.17

934.25

24.87

Apr 08

524.85

42.31

871.00

26.61

May 08

550.91

44.51

885.75

24.76

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

Higher

Higher

Lower

Higher

Lower

Lower

 

 

May 08 

 

+1

 

+1

 

+1/2

 

+1

+3.5

 

Last month, I had the lowest numbers I’ve seen, but I suspected that they were an abnormality.   And this month, again suggests strong inflation.  Click here for more information on the model.

What’s ironic are the government statistics on inflation!  In April the government reported the CPI at 0.2% vs. consensus 0.3%; ex-Food & Energy 0.1% vs. consensus 0.2%  The May report for April’s statistics showed energy expenses were unchanged after a 1.9% increase in March as gasoline prices dropped 2%. Fuel oil costs jumped 4.4% and natural gas prices climbed 4.8%.

The following table shows oil (USO) and natural gas (UNG) prices on their closes in March, April, and May, along with the percentage increases.   And those figures will translate into inflation in almost every aspect of the economy.

Month

USO (oil)

% Change

UNG (gas)

% Change

March

$81.36

 

$48.50

 

April

$92.50

13.7%

$52.26

7.75%

May

$103.06

10.3%

$55.66

6.5%

Oil went up 13.7% during the month of March and another 10.3% during April, while natural gas rose 7.75% and 6.5% respectively.   Those translate into annual rates of over 100%, and energy factors into increased prices for almost everything. And the government is telling us what?   Well, there are lies, damned lies, statistics, and then government statistics!  I guess the government thinks it can tell us anything and we’ll believe it.

Meanwhile at www.shadowstats.com, John Williams tells us that the government is increasing the money supply (M3, no longer reported by the government) at 17%, unemployment (the government doesn’t count people after their benefits run out) is at 13%,  the CPI is running at near 12% (the old CPI the way it used to be calculated), and all that means is that we are severely in a recession with the inflation adjusted GDP growth around -2%. 

Part V: Tracking the Dollar

With the Federal Reserve lowering interest rates, I expect the dollar to really be 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 table because it really says it all. 

Month 

Dollar Index 

Jan 05 

81.06

Jan 06 

84.29

Jan 07 

82.37

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

Mar 08

70.32

Apr 08

70.47

May 08

70.75

Notice that the dollar is now showing a slight recovery after a massive decline.   I’m going to  Fiji next month and  Germany the month after that.  Thus, you can expect to see the dollar falling a lot in those months.  Again, laugh, because that’s my attempt at humor today.  It won’t be so funny when I’m in  Europe.

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.

 

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Trading Tip

Oil and Gas – Crudely Speaking Part III

by
D.R. Barton

“The purpose of computing is insight, not numbers.”
— R.W.Hamming, American mathematician and computing pioneer 

Since last week’s article, oil prices have continued to slide lower in a stair-step fashion (even if it’s a jerky stair- step…).

I find it interesting to read all the opinions on oil prices. Some call these price levels a bubble. Others say that this price action is just a stepping stone to $200 per barrel of oil.

Traders I talk to are mostly looking for the pullback to continue, perhaps in dramatic fashion. But no one thinks that shorting the crude market is a sure ticket to riches. This market is one of the most sensitive to outside influences, especially geo-political hiccups.

Before we take a look at some interesting fundamentals (gasp!), let me be clear that trading in crude oil is only for big girls and boys – the volatility of crude in absolute terms is at all time highs. Right now, the average true range of crude oil futures is sitting at $4.38. This is more than three times where it was in July of last year. It is not a market to dabble in if you can’t stand wide stops (psychologically or monetarily). 

Some Driving Forces for Crude Oil Prices

There are, of course, many fundamental issues driving the price of crude oil. One of the most compelling charts I’ve seen is shown below.

This chart is from Chris Mayer, who credits Barry Bannister, an analyst at Stifel Nicolaus. The chart shows crude oil prices plotted as a function of money supply. (Click on the chart if your image is not displaying clearly.)

In short, the conclusion that could be drawn is this: as the supply of paper dollars has gone up, the price of crude oil has increased in a highly correlated fashion.

The ramifications are obvious – I teach my third grade economics students about simple supply and demand curves. Oil is denominated in U.S. dollars; as the supply of dollars goes up, there is more “money” chasing the same amount of goods. This inflates the price of the commodity being purchased with dollars.

A similar effect can effect can be seen with the Euro currency vs. the dollar, although the increase there is much more modest. Here’s a chart that compares the Euro in dollar terms vs. crude in dollar terms. The chart shows the percentage change of each since the beginning of 2002:

So it’s clear that the supply of dollars has had an effect on oil prices, but it by no means is the only reason for this amazing run up in crude.

That insight is important. With the continuing credit crunch (Lehman being the most recent victim, and is not likely the last), the Fed will not be tightening money supply any time soon. So while crude is due for a technical pullback (which is well underway), more dollars chasing the same amount of crude is likely to add to the long-term inflationary picture.

Until next week…

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”. 

 

Melita's Inspirational Corner

Always Something to Do

by
Melita Hunt

There are moments in our lives that truly are “one-off’s.” Examples of “one-off’s” might be a child’s graduation (or just their school recital), a party to celebrate someone or something special, an exhibition or a concert that you really want to attend or an opportunity to go somewhere or to try something new.

On the flipside there are day to day moments in our lives that are always occurring and will constantly continue to do so. They may be our jobs, our responsibilities, our chores or just those “things” that we think we must do, or feel committed to doing (sometimes without actually knowing why).

How often do you stop and look at those commitments and what you do on a day-by-day basis? And my main question is how many “one-off’s” do you miss out on because of some of these day- to- day things?

Now I will admit that my world has turned upside down in the last year and my day-to- day chores have changed considerably. But I had two “one-off” moments in the last week that I was absolutely committed to make happen.

One was my best friend’s wedding. The other was my Mum’s birthday. To attend and create both things, I would be taking time and energy away from some work that I believed that I needed to do, both personally and professionally.

I have already missed a substantial amount of work (which people totally understand because of my condition) but there is a certain amount of obligation and responsibility that I choose to be accountable for, so doing the “one-off’s” was not as easy as I thought it would be. And, I actually found myself thinking that I was slacking off (which is something that I get to work on!).

In the past I would have been able to do it all, but right now I don’t have the energy to do that, so I really need to be conscious of the choices and sacrifices that I am making.

With the wedding, I required help from staff and sufficient rest time and assistance to ensure that I could attend. For my Mum’s birthday I planned a three day jaunt to New York city, which really needed good planning and rest time. However, both of these things are truly “one-off’s.” The wedding speaks for itself, and as for the birthday surprise, well it is not often that my mother would be here in the USA to share this moment and who knows what future birthdays will entail.

But how many little things do we forget are “one-off’s” and then miss out on them? These two events may seem like no brainers, but there are many other little things that get put to the wayside because we believe that our day-to-day things are more important.

My point in this article is that there is always going to be something to do. Life is full of day-to-day stuff. So please remember to take time out and look at the things that you are committed to doing on a day by day basis.

Also, consider which events truly are “one-off’s.” Do you take the time to think it through? It may be the last time that you get to attend a grandparent’s birthday, or to see your child in a school play. (I still remember the times that my Mum and Dad came to see me at school and the times that they didn’t.) Perhaps someone is coming into town who you would love to have time to see? Or an exhibition or show is that takes your fancy. 

So think about whether you make it a habit to take advantage of these “one-off” moments, or do you find yourself missing out on them more often than not? Have you fallen into the trap of day-to-day things taking precedence without even knowing why?

If so, then the question to ask yourself if you want things to be different is: 

"How and when will I do it?"

Enjoy the “one- off” moments. They really are worth it! And are probably the reason why we work so hard!

  

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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