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Tharp's Thoughts Weekly Newsletter

July 30, 2008 — Issue #383  
  
Article

Market Update by Van K. Tharp, Ph.D.

Trading Tip

Trading and Learning with the Pro's Pro by D.R. Barton

Workshops

Dinner with Dr. Tharp

Melita's Corner

Natter Natter Natter by Melita Hunt

Feature

Market Update for July 2008

Market Condition: Volatile Bear

by
Van K. Tharp, Ph.D.

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

The secular bear market continues‼! On July 29th the S&P 500 closed at 1263.19. Ten years ago, at the end of July in 1998, the S&P 500 closed at 1120.67. Thus, if you’d held the S&P 500 for ten years (and that includes selling all of those that dropped out of the average and buying the new entries), you’d be up a total of 142.52 points. That’s a compounded annual growth rate of 1.2% -- almost 25% higher than when I calculated it two weeks ago. But that included the last two years of the massive bull market that ended in 2000. Eight years ago, at the end of July 2000, the S&P 500 stood at 1462.93. Thus, in the last eight years since the secular bear market began, you would have LOST 199.74 points or 13% by buying and holding the U.S. stock market. That is a compounded annual loss of -1.2%. And that’s while the dollar has lost about 40% against the Euro and the real rate of inflation has been very high (according to www.shadowstats.com).

That’s why I keep telling people that you cannot afford to just say “I’m an average investor.” That’s equivalent to a brain surgeon saying, “I’m just an average brain surgeon," meaning he’s had no expert training in his craft except to perhaps kill a few people. You need to train yourself to really be able to make money in these markets because, in my opinion, we have at least another 8 years to go on the secular bear market.

By the way, gold currently stands, as of the London PM close on July 29th, at $923.50. On July 31st 2000, gold was at $276.75. If you had bought and held gold over the last eight years, your annual return would have been 16.26% and you would have been ahead of inflation. And that’s buying and holding. As a trader you could have done much better and there were many other investments that have done very well at various times during this secular bear – such as the Brazilian and Chinese stock markets.

We’ve had an interesting Month of July – even though I’m writing this just before July ends because of my trip to Germany. This is a very scary market right now and most of you should probably be 100% cash.

Part II: The Current Stock Market Type Is Volatile Bear 

I have now substituted my new market type for the 1-2-3 model. I’ve done that 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).

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. 

2008 Market Classification

Market Condition Date
Volatile Bear 8/1/2008
Quiet Bear 7/25/2008
Volatile Bear 7/18/2008
Volatile Bear 7/11/2008
Volatile Sideways 7/4/2008
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 and one exception in July).

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

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%
3-Jul-08 11,288.53 -14.90% 1,262.90 -13.99% 1,816.35 -12.88%
11-Jul-08 11,100.54 -1.67% 1,239.49 -1.85% 1,810.88 -0.30%
18-Jul-08 11,496.57 3.57% 1,260.68 1.71% 1,823.23 0.68%
25-Jul-08 11,370.69 -1.09% 1,257.76 -0.23% 1,846.55 1.28%
29-Jul-08 11,397.56 0.24% 1,263.19 0.43% 1,845.55 -0.05%
Year to Date 11,397.56 -16.38% 1,263.19 -16.24% 1,845.55 -12.97%

The last week only includes two days as I’m preparing to go on a trip and cannot write this on the weekend.

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. We’re also officially in a bear market because we’re down 20% from the October 2007 highs.

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. The relative strength of each component is given in parenthesis. 

Part III: The Strongest and Weakest Market Components

Five strongest components, in order:

1) Gold (66)
2) India (66) 
3) Small Cap Value US (66)
4) Small Cap Blend US (65)
5) Long Term Treasuries (63)

None of these are really worth investing in right now. India was the weakest component last month. You should probably be in cash right now.

Five weakest components, in order:

1. Belgium (19)
2. Brazil (22)
3. Austria (25)
4. Latin America (26)
5. Sweden (31)

These are also very dangerous to short right now. Remember that India was the weakest component last month and it jumped to the second highest. As I said, you should probably be in cash right now.

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. The inflation is obvious, but simply masked by government statistics. Now let’s look at the results for the last six months. Remember that the Fed has now chosen to produce inflation and a strong dollar devaluation over the pain of the subprime crisis. The end of the month values for July are July 28th-29th values, not July 31st.

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
Dec 07 476.08 41.7 833.3 28.9
Jan 08 503.27 38.62 923.2 29.14
Feb 08 565.65 40.87 971.5 25.83
Mar 08 525.25 40.17 934.25 24.87
Apr 08 524.85 42.31 871 26.61
May 08 550.91 44.51 885.75 24.76
Jun 08 571.9 41.64 930.25 29.12
Jul 08 544.01 39.87 916.75 21.37

We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been. Notice the huge drop in the financial (XLF) so far this month. 

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
  Lower Higher  Lower  Higher Higher Lower  Lower  Lower  
Jul 08      +1/2    + 1/2    - 1/2    +1 +1.5

Again the numbers suggest that inflation is present, but getting weaker. I don’t believe them because of the information below. Click here for more information on the model. This time, energy is confirming the decline in inflation.

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 just 16%, unemployment (the government doesn’t count people after their benefits run out) is at 14%, the CPI is running at over 12% (the old CPI the way it used to be calculated).  We are definitely in a recession with the inflation adjusted GDP growth at -2%+. And banks are folding. 

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. However, 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
Jul 08 70.84

Based upon the "Tharp factor" (I’m going overseas), expect a new low in the dollar before I return on August 18th. I’ll be pleasantly surprised if something different occurs. 

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.

 

Trading Tip

E-Mini Futures – Trading and Learning with the Pro’s Pro

by
D.R. Barton

Reality TV is a mind-numbing constant on sets around the world. Whether you’re in Australia, Japan or the good ol' U.S. of A., people tune in by the tens of millions to watch performance and survival competitions of every possible style.

I believe that one of the main reasons people tune in so readily is that we have a deep-seated curiosity to see the “real thing” in action, to see truly talented people separate themselves from the pack. For example, which one in this group of nannies, auto mechanics and school teachers will prove that they can sing well enough to earn a recording contract? Or who can survive the physical and psychological rigors of the Australian Outback?

People around the globe love to see the cream rise to the top.

In a very real way, the financial markets set up their own reality game – one that is played out every day and one where the score is kept in terms of both dollars and psychological capital.

I want to re-introduce you to one of the “real deals” from Wall Street, my good friend and business partner Christopher Castroviejo. Christopher is truly the pro’s pro when it comes to trading.

I want to tell you a bit more about him and his background, but before I do that, I wanted to share some of the things that I have learned while trading, working, teaching, and managing money with Christopher. Here are the lessons that I have learned from the “Pro’s Pro”:

  • First and foremost, professionals have an understanding of what works in the market. They turn that market knowledge into a plan, and then stick to the plan in an unwavering manner.

  • Pro traders have a game plan and prepare for the market each day. This preparation gives them a structure to provide consistent results while enabling them to have the flexibility to make money under many different market conditions.

  • Pro traders take what the market gives instead of forcing their will (or their strategy) on the market. They have multiple tools in their toolkit to allow them to participate in different market conditions.

  • And of course, pro traders follow Van’s Ten Task of Trading. Van has been modeling trading excellence for decades and his ten tasks are the cornerstone characteristics that are shared by everyone who rises to the top.

A Market Maven in Every Sense of the Word

I’ve had the pleasure of trading with many different professional traders. Christopher Castroviejo is at the top of that heap.

Webster defines the word “maven” as one who is experienced or knowledgeable. But Christopher is more aptly described by the Wordnet definition: “someone who is dazzlingly skilled in any field”. Christopher’s depth and breadth of knowledge in the trading world is second to no one that I know. But that knowledge didn’t come overnight…

Christopher has spent 37 years in and around the markets, and his résumé and track record on Wall Street became something of a legend: stints with Smith Barney, J.P. Morgan, a partnership at Bear Stearns, and financial consultant for The Vatican Bank to name a few. Christopher was hot and getting hotter. Highlights include turning $10,000 into $178,000 in four weeks, 8 straight years of 43% compounded profits as a top hedge fund manager, a sleek Manhattan brownstone and a spacious summer getaway in the tony Hamptons. Christopher even struck up a friendship with his money-making idol, billionaire George Soros (to be honest, the people Christopher has worked with in the field are a veritable “who’s who” of Wall Street elite). 

Along with multi-million dollar wins, there were a few huge losses; in just six short weeks, $10,000 became a cool million, and quickly nothing but air. And, in one monumental transaction gone wrong, Christopher lost $15 million dollars in just a few months…$1.5 million of it his own money. But, unlike the Vegas poker player who can’t leave the table, Christopher learned from the missteps as well as the wins. “You have to reinvent your performance all the time. I used to see the business as just about orchestrating wins, but the rational way of thinking about it is really about controlling your losses.” 

Anyone who has read Jack Schwager’s Market Wizards series (the first of which featured a chapter on Van) knows that many of those top drawer players became the traders they are by learning lessons in their own personal “trials by fire.” Christopher has certainly been through his own version!

Today, Christopher is an active intraday and swing trader and he continues to manage money for a select list of Wall Street insiders.

Christopher is a master at several aspects of intraday trading and is particularly skilled in the application of key level support/resistance and Market Profile. 

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”. 

 

Workshops

Dinner at Dr. Tharp's 

All Peak 101 and 202 attendees are invited for dinner with Dr. Tharp, Monday September 22, 2008.

September 20-21-22 Peak Performance 101
September 24-25-26 Advanced Peak Performance 202

Click here for pictures of our April 2008 dinner.

 

Melita's Inspirational Corner

Natter Natter Natter

by
Melita Hunt

I went for a walk around my infamous lake the other day, just as I do most evenings, and about 15 minutes into my journey I suddenly realized that I couldn’t even remember getting to the spot where I was. In fact, I couldn’t even remember what I was thinking about or what was on my mind for the previous 15 minutes. It had just been nattering away endlessly. So I took a seat on one of the lovely benches with the sole purpose of focusing on the beautiful lake and watching the ducks and staying in the moment. However, it happened once again. Before I knew it, another 15 minutes had passed and my mind had been off with the fairies. I had one thought about work and before I knew it my mind was nattering away again, and I had gone on a wild goose chase in my mind, completely forgetting where I was. 

It got me thinking about how often we go through our days completely oblivious to the moment and what our minds are really thinking about.  How often are we caught up in endless useless chatter and what is it doing to us? It certainly isn’t helping us to appreciate the moment. 

The remainder of my walk (another 20 minutes) was spent staying in the moment. I consciously chose to only notice my footsteps, the lake, the birds and the sky. And it became quite meditative, which is the way that I want to feel when I am outside in nature. I noticed some people lost in their thoughts, others said hello, while others were deep in conversation on their cell phones, oblivious to my presence, or that they were walking around a beautiful lake. 

I know that we are often in our own little worlds after a long day, this is especially evident on trains or watching people in traffic, everyone seems to be on auto pilot. But when do we stop the nattering mind and for how long each day?

There are some people who do meditation or exercise to stay in the moment, but I hazard to guess that the phenomenon of being present and actually noticing where we are and what is actually happening in each moment is a rare occurrence. I think it is something that we should endeavor to do more each day. 

Surely it’s better than constantly losing 15 minute segments of our lives, caught up in thinking about things that have already happened or may never happen. 

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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