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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. 

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.

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.

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

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.