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Tharp's Thoughts Weekly Newsletter

July 02, 2008 — Issue #379  
  
Workshops

Van Tharp In Germany Next Month

Article

Market Update by Van K. Tharp, PhD

Updates

Fall Workshops in the USA

Trading Tip

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

Melita's Corner

Transitioning to Transformation by Melita Hunt

Coming Soon

Van Tharp in Germany Next Month

 

Limited Space. Book now to reserve your seat.

 

 

Blueprint for Trading Success August  4-6 Germany
Peak Performance 101 August 8-10 Germany

Click here for workshop information, pricing and hotel information

 

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.

2008 Market Classification

Market Condition

Date

Volatile Bear 6/27/2008
Volatile Sideways 6/20/2008
Volatile Sideways 6/13/2008
Volatile Sideways 6/6/2008
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

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.

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

-0.61%

1,248.29

3.07%

1,645.20

1.49%

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%

30-May-08

12,638.32 

-4.72%

1,400.38 

-4.63%

2,032.57 

-2.51%

06-Jun-08

12,209.81 

-3.39% 

1,360.68 

-2.83%

1,990.39 

-2.08%

13-Jun-08

12,307.35 

0.80%

1,360.03 

-0.05%

1,966.01 

-1.22%

20-Jun-08

11,842.69 

-3.78%

1,317.93 

-3.10%

1,928.39 

-1.91%

27-Jun-08

11,346.51

-4.19%

1,278.38 

-3.00%

1,855.72 

-3.77%

Year to Date

11,346.51

-16.91%

1,278.38

-14.86%

1,855.72

-12.35%

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.

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

June 08

571.90

41.64

930.25

29.12

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

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

 

Higher

Higher 

Lower 

Lower

Higher

Higher 

Higher 

Higher

 

 

June 08  

  

+1

  

-1

  

+1 

  

-1

0

 

The numbers suggest that no inflation is presentI 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.

Month

USO (oil)

% Change

UNG (gas)

% Change

March

$81.36

 

$48.50

 

April

$92.50

13.7%

$52.26

7.75%

May

$103.06

11.4%

$55.66

6.5%

June

$113.73

10.4%

$62.83

12.9%

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. 

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

Jun 08

71.44

I leave for Fiji on Wednesday and then go to Germany in August.   So based upon the Van is traveling scale, I expect the dollar to go down substantially in July and August.    I’ll be pleasantly surprised if it doesn’t.

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.

 

Updates and Additions

Fall Workshops in the USA

September 13-14-15 Professional E-Mini Futures Tactics 
September 20-21-22 Peak Performance 101
September 24-25-26 Advanced Peak Performance 202
October 11-12-13 Blueprint for Trading Success
October 15-16-17 ETF and Mutual Fund Techniques 101
November 1-2-3 Professional Day Trading Strategies
November 4 One Day Swing Trading Techniques
November 7-8-9 How to Develop a Winning Trading System That Fits You
November 10-11-12-13 Super Trader Workshop (for current members and graduates only)

Trading Tip

Oil and Gas – Crudely Speaking Part VI

by
D.R. Barton

I’m open to the possibility that crude oil prices will not go down again; I’m not very keen on the probability, however.

Right now, it’s a commodity on steroids, going up with a progressively increasing rate of ascent. Take at look at the interesting visual below.

The first thing to notice is the impressive climb since February. The second is how the rate of the climb keeps shifting to higher gears. (My technical analysis friends will note that these blue lines are not “true” trend lines since only one of the four offers three points of resistance along its slope.)

The key thing I’ll be watching for in this market is a fundamental trigger. There are many out there that could take us rapidly up or down. To evaluate the key factors out there, let’s use the “two-handed economist approach” (on the one hand this could happen; on the other hand…).

And since this market is now on the front of almost everyone’s radar screen, keep in mind that it will most likely remain very volatile with sudden and severe jumps to both the up- and downside as it sorts itself out. 

Any mention of the following could cause an even more energetic burst to the upside:

  • Terrorist or internal conflict strikes on any oil field meaning to do economic or political harm to the owner of the field.
  • Any news that BRIC (Brazil, India, China) demand is increasing in rate.
  • Any hint that Saudi Arabia will not or is not meeting its commitment to increase daily output.

Factors that point to the downside for an intermediate correction:

  • U.S. and foreign demand is finally showing tangible signs of slowing due to increased prices.
  • A strengthening U.S. dollar (whether by market forces or Fed intervention) will have a negative effect on the price of crude.
  • A Fed increase in interest rates to slow inflation.
  • If the U.S. decides to sell any significant portion of its strategic petroleum reserve (which is now almost at full capacity).
  • A slowing of commodity fund indexing by large institutions (which has increased). 

Frankly, a whole article could be written on any of these points (and many have been). But the last one – commodity fund indexing – deserves a little extra explanation.

Large pension funds and endowments typically are very risk averse, and this has traditionally meant minimum exposure to the commodities market. But with commodities outperforming equities by a wide margin, that trend has changed. According to Barron’s, the amount of money dedicated to commodity fund indexing has grown from $13 billion in 2003, to $260 billion as of March of this year. It doesn’t take a Nobel prize winner to figure out that an infusion of that much cash into the market (with an outsized share going into the energy sector) has contributed to the rise in oil prices.

And as the politicians look for any magic button to push to ease the gas price outcry, they are targeting these commodity fund indexing strategies. We’ll finish up this topic next week.

Until then, keep sending thoughts and comments to drbarton “at” iitm.com and …

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

Transitioning to Transformation

by
Melita Hunt

Today is a small transition for me because it is the first day that I feel I have to wear a hat to go outdoors. I don’t want to wear one because it is a particularly hot day and I’d rather not have a hat on my head. However, having people staring at my tufts of hair is something that I want even less. So I guess that the lesser of two evils is the one that I will choose when I leave the house. And I’ll deal with it in good faith.

Some of you may be sitting there saying “to hell what people think.” And I hope that one day I will feel that way, but today is not that day because the truth is society is uncomfortable with cancer and all that it entails. It is frightening to see someone going through this experience, and we cannot help but to look and stare or comment. It's just part of being human, I guess. I just don’t feel like being the topic of conversation today.

But it did get me thinking about transitions.

To go through a transition is simply to have an experience or an event that results in a transformation.

Sometimes we choose them and at other times they are forced upon us. Van is flying out to Fiji today to attend a Deeksha Enlightenment Training. He believes that it will be a huge transition in his spiritual growth and I hope that he gets to experience some “Aha” moments on his journey.

I, on the other hand, feel that I am also getting a big transformational lesson in spiritual growth, but in a very different way. Van is actively choosing his particular transition by planning this trip to Fiji and if I chose mine, through the realm of illness, then I certainly did it unconsciously! But nevertheless, I am experiencing it.

When I think back to other transitional/transformational moments in my life, I would have thought that the biggest moments for me would have been in those moments that I hadn’t chosen, such as the loss of a loved one, or going through a breakup/divorce or experiencing a job loss. But when I really think it through, that isn’t the case. Many of the transitional moments in my life were actively chosen; they weren’t forced on me. Often, I felt that I was in a rut and I actively made a decision to do something about it and took action. I attended a seminar, or moved countries or jobs. I did something that would upset the status quo until a transition took place.

Looking back at it now, I guess that I enjoyed creating transformational moments.

So where do you stand in regards to transformational moments in your life?

Do they happen often? Perhaps you are content with where you are at and transformation isn’t important to you.

Right now, I am ready to slow down on transformation and take a break for a while, but if you feel like you are in a rut, then perhaps it is time for you to ramp up your transformation and to upset the status quo. Get some transitions happening! Where in your life have you lost your joie de vivre? What are you being blasé about? Think back to the last time that you felt a transition or a transformational shift. Are you due for something more? 

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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