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Feature

Tharp’s Thoughts

Market Update for June 2008

Market Condition: Volatile Bear

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 (first 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

We’ve had an interesting month of June.  Although I don’t keep that kind of data, I heard it was the worst June for the Dow Jones Industrials since1930.   And that’s really saying something.   However, the recent downturn has only just changed from a volatile bull to a volatile bear.  Be careful of this one.

Part II: The Current Stock Market Type Is Volatile Bear (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, because as soon at 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 doesn’t really fit my current beliefs.   For those of you who are still interested, it is in red light mode (unless the S&P 500 PE ratio is now below 17, which could happen any time and that's the reason I stopped using the model).

Two months ago, 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.  That data is included below.  Notice that even though it was a terrible month the market classified it as volatile sideways until last week when it turned into a volatile bear market.

You’ll notice that basically every week of 2008 is volatile (with one exception in late March).  I’d like to see two straight volatile bear weeks before I really say the market has changed.  But this market looks pretty brutal. 

So now let’s look at what the market has done during the month of June.

All three major indices are still down for the year by double digit losses.  And we’re not too far from an official pronouncement for a bear market.  In fact, that level (a 20% drop from the high) has been touched intraday. The Dow was down 10.22% on the month – the largest monthly drop for the DOW in June since 1930.  The S&P 500 and the NASDAQ 100 were both down 8.7% on the month.

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.   However, I’ll only list the strongest areas if they are up for the year and not just strong recently (This month there are less than 5).  The relative strength of each component is given in parenthesis. 

Part III:   The Strongest and Weakest Market Components

Five strongest components, in order:

1)  Oil (97) Is this surprising?  I don’t think so. 

2)  Commodities (91) This is what happens in an inflationary market. 

Others making the grade were gold and long term treasury bills, but only because of recent activity.

Five weakest components:

1)     India (2) -- India was in strength last month and has had a major correction down.

2)     Belgium (7)

3)     Sweden (11)

4)     Netherlands (24)

5)     A number of areas were tied at (32) – China, Taiwan, France.

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.

The numbers suggest that no inflation is present.  I don’t believe them because of the information below.  Click here for more information on the model.

The following table shows oil (USO) and natural gas (UNG) prices on their closes in March through June, along with the percentage increases.   These figures, in my opinion, give a pretty good idea about inflation because energy costs will translate into inflation in almost every aspect of the economy.  We’re seeing double digit increases each month, which would translate into triple digit annual returns.

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 16%, unemployment (the government doesn’t count people after their benefits run out) is at 14%, 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 and -2%+.   And perhaps the market is starting to realize that.

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.  Despite that, the dollar has gone up for two months.