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Tharp's Thoughts Weekly Newsletter

July 24, 2008 — Issue #382  
  
Workshops

Germany Workshops

Article

The Implications of a Secular Bear Market by Van K. Tharp Ph.D.

Updates

Addition to the Fall Workshops in the USA

Trading Tip

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

Coming Soon

 

Germany Workshops

 

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

The Implications of a Secular Bear Market

by

Van K. Tharp, Ph.D.

By the end of 2000, I said to everyone that we were in a secular bear market that would last 15-20 years.  When the bull market of 2003 happened, the media announced (and many people believed) that the bear market was over and a new major bull market had begun.  But I pointed out that while the market was up strongly in 2003, the dollar was down against the Euro by almost 40% in 2003.  That’s not something to cheer about.

My purpose in writing this article is to refresh you on the potential impact of the secular bear market and to remind you that what we teach at the Van Tharp Institute should enable you to profit handsomely during such times of crisis.  In addition, I want to review some of the principles that are required to profit during these times.  If you forget even a few of them, you could lose a lot of money.  These principles do work,  but you must apply all of them for the best success.

On July 20, 1998 the S&P 500 stood at 1140.80.  Ten years later on July 16, 2008 the S&P 500 stands at 1245.36.  That amounts to a 10-year gain of 104.56 points or 9.1% in ten years.  That’s a compounded annual growth rate of 0.88%.  That’s what I’d expect from a secular bear market, and it could get much worse.  The media is just starting to admit that we are 1) in a recession and 2) in a bear market.  What happened to the 10% per year that the financial gurus were advertising for people to just buy and hold?  Add to that the following facts:

  • The St. Louis Federal Reserve published a study that basically concluded that the United States was bankrupt with a debt of 67 trillion dollars, including future obligations. Click here  to read the article.  However, I’ve seen estimates that our total obligations are now more like 90 trillion.  And, of course, no one in politics today is saying anything.

  • Ten years ago, the dollar was at 101.10 versus other major currencies.  Today, it is worth 70.78.  That’s a drop in real wealth of 29.8% during the last 10 years.

  • Real inflation is much higher than the governments adjusted CPI figures and is currently running over 12% based upon the way the U.S. government used to calculate the CPI.  Thus, you could have easily lost about 9% a year to inflation over the last ten years.

  • Today, we’re looking at energy inflation of about 10% per month (see the last few issues of Tharp’s Thoughts), which affects the entire economy and could easily translate into a huge real CPI increase based upon the way the government used to calculate such statics.

  • In addition, the media is starting to publish articles saying that stocks are at bargain prices.  And Warren Buffett is being quoted as saying that he’d love to see prices go down 50% because then he could buy a lot more at bargain prices.  But you are not Warren Buffett, and I personally wouldn’t want to have money invested in Berkshire Hathaway over the next 10 years.  (IITM’s retirement fund actually owns one share of the B series so that I can get his comments regularly).

  • Debt in the U.S is at staggering prices and home prices are down substantially. 

  • The major banks are in a huge financial crisis and really don’t understand what is going on.  J.P. Morgan for example has 90 trillion in derivative exposure and the only thing saving them is that they are the largest owner of the Federal Reserve and the Fed has guaranteed that they can turn in their junk for treasury bills (on a temporary basis that could be permanent).

  • And lastly, the baby boomers are about to retire, which will pull a huge amount of equity out of the stock market.

So after all of the doom and gloom, what’s the answer?  The first thing I want you to know is that there are positive forces going on that will eventually more than counteract all of this.  I’m not prepared to talk about them at this time, but they do exist.

Second, you absolutely must do some work to educate yourself.  Good trading is a profession, and I believe that it takes a solid two years of work to educate yourself to the point where you can apply these principles.  You can probably coast after the two years, but I don’t believe that you can use the excuse “I’m just an average investor” to keep you from learning the principles and doing the work.

However, as a refresher here are major principles that you must thoroughly understand:

  • Trading is 100% psychology so you must master yourself.  However, everything is psychology, so that’s why I can make that statement.  You can only trade your beliefs (which are psychological filters to reality).  Even the act of executing a trade involves the mental strategy of 1) seeing the signal; 2) recognizing in your brain that this is the signal you should take; 3) feeling good about it; and then 4) acting.

  • Given that everything is psychological, success in the markets is 60% discipline, 30% position sizing, and 10% system.  You can have a great system that will be destroyed by mistakes created by a lack of discipline.

  • You should never enter into a position without having a worse case exit, which I call a 1R (R stands for risk).  You also need profit taking exits.  The bottom line is that you should always be looking at cutting your losses short (making them 1R or less) and letting your profits run (making them much bigger than 1R).

  • You need to develop a business plan that includes (but there is a lot more) the big picture, at least three non-correlated (totally different concepts) systems, and a worst case contingency plan.

  • Your system must fit your beliefs about the market or you will not be able to trade it properly.

  • You need to know how your system will perform in various types of markets.  And my definition of market type (based upon the S&P 500) is published monthly in Tharp’s Thoughts.  When you have a market type in which your system does not perform well, you shouldn’t be trading a system that works in that type of market.

  • 90% of performance variability is due to position sizingSM and few people understand that concept.

  • If you don’t know yourself, then you cannot determine what you really want from the markets.

  • Your system has nothing to do with meeting your objectives.  You meet your objectives through position sizingSM.  Few people understand this, even those who understand the impact of position sizingSM.

You can make money under these conditions, and you do can so without doing a lot of work (perhaps trading a few hours a day).  For example, we have systems that I would define as Holy Grail systems.  Some of them are even fairly long term, but you must know when to apply them.  And most of you, right now, would make so many mistakes trading them that you would destroy them – at least until you have done the necessary preparation work. 

Furthermore, let me repeat, you meet your objectives through position sizingSM.  A Holy Grail trading system would only make it easy to do.

But to get to the point where you can do that easily, requires some work.  And please don’t use the excuse, “I’m just an average investor!”  Did you start in your profession without any training, saying “I’m just an average doctor or engineer or IT professional?”  No, you didn’t.  You prepared yourself.  What most of you are doing as “average investors,” trading in today’s market conditions without adequate preparation, is equivalent to operating on someone’s brain without any training or building a bridge without any training.  If you did so, the person you were operating on would probably die (99.9999%) and the bridge would collapse.  Investing in today’s secular bear market without thoroughly understanding all of the above principles means that your financial nest egg will probably die.  Many of you did that in 2000-2002.  Don’t keep doing it.

I will be amplifying on these principles on future articles in Tharp’s Thoughts.  In the meantime, my recommendations for you to be adequately prepared would be to do the following in this particular order:

  • Read the second edition of Trade Your Way to Financial Freedom until you thoroughly understand it and all the concepts.  This may take numerous readings.

  • Take our Blueprint for Trading Success workshop.  This, in my opinion, is the core workshop that we offer that gives you a thorough understanding of what you need to do to prepare yourself.

  • Complete the Peak Performance Home Study Course thoroughly.  That might take several readings and months to do.

Once you’ve done those three things, you’ll probably have a good idea of all of the other information and resources that you’ll need.  And we offer those, but you need this foundation first.

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 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 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 X: 
 The Real Wrap-Up or “Ten is Enough”

by
D.R. Barton

In the short-run, the market is a voting machine; in the long-run, the market is a weighing machine.--Benjamin Graham

This week, we’ll wrap up our crude oil and gas series on a technical note.

In the past week, we’ve seen the world order turned on its head (at least from a financial market’s perspective); oil is down, homebuilders are up, grains are down, dollar is up – even the bedraggled financials are trying to dig out of the price pit.

But let’s not all join hands and start dancing the Lobster Quadrille to honor the passing of the tough markets just yet!

While it feels good to get some relief from fairly relentless inflationary and bear market pressures, let’s bring a little rational thought to the picture (and in the form of some pictures…).

First, let’s look at one of my favorite charts – the relative performance charts from the folks over at Stockcharts.com.

You can tell which solid line is which by using the key at the top of the chart. Each line shows the percentage movement away from an arbitrary date that is 200 trading days in the past.

And hasn’t it been an interesting 200 days? Crude is way up; agricultural commodities are strong too, as is gold.

The most surprising thing? The S&P has been weaker than the dollar. And while a declining dollar has played a roll in the run-up of all of the assets that above the “0” line on our chart, it’s clearly not the major reason.

Also, there’s no surprise that financials and homebuilders are the weakest things on the chart; the credit crunch has been painting all players within its impressive reach with a very broad brush.

So that’s the history. What might the future hold?

Crude is coming up to a very important technical juncture as seen on the chart below.

For those of you who haven’t seen this chart in previous weeks, the blue “fan” lines are just accelerating rate-of-change lines that I drew as crude was powering up. It has now broken all of them in a matter of three weeks. (As my good friend Chuck LeBeau says, “Markets crawl up the stairs and jump out the window.”)

We’re seeing increased volatility in many markets (see the crude chart above where volatility is approaching its all time high from just this past June). This volatility bodes well for day traders, but can be tough to manage for swing or longer term players.

We’ll be talking next about the current state of the day trading market as I grow more excited about our highly reviewed E-Mini Index Day trading seminar that is coming up in September. It will be the only one we’re doing this year, and we’re adding some new concepts and trading strategies that I’m truly stoked about! Until next week…

Please keep those comments coming to drbarton “at” iitm.com.

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

Melita is not available this week. Look for another update from her next week. 

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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Copyright 2008 the International Institute of Trading Mastery, Inc.

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