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Tharp's Thoughts Weekly Newsletter

November 25, 2008 — Issue #400 
  
Trading Education

SALE: All Core Van Tharp Materials, on Sale Now!

Article

How to Cope With Today’s Volatile Bear by Van K. Tharp

Workshops

Blueprint Added to Sydney, Australia Schedule

Trading Tip

Crude Oil Climbs Up the Stairs and Jumps Out the Window, Part III by D.R. Barton, Jr.

Trading Education

End of Year Sale

 

Peak Performance Home Study...20% Off

How to Develop a Winning Trading System that Fits You...20% Off

Definitive Guide to Position Sizing...10% Off

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Feature

How to Cope With Today’s Volatile Bear:

Some of Your Questions Answered

 

by 
Van K. Tharp, Ph.D.

I’ve been getting a lot of questions about this market.  I actually am putting on an extra Blueprint for Trading Success workshop which answers a lot of these types of questions, but it is already sold out.  As a result, I thought I'd give you some of the answers you’ve been requesting in a dialogue format.

I’m retired and much of my retirement income has been wiped out.  I still work and need to know what I can buy to still make a little extra money.

If I directly answered that question with recommendations it would be high risk for me.  I don’t give recommendations… I teach people how to generate their own.  People who are asking me for recommendations are not taking personal responsibility, so they’d also be likely to blame me if my recommendations did poorly.  Giving recommendations is just not what we do.

First, there are newsletters out there that are excellent.  The two best are True Wealth and the Weber Report.  Don’t expect any recommendations out of Chris Weber right now because he believes, as I do, that the bear will not end until PE ratios for the DOW and S&P 500 get well into single digits and yields are around 7%.  We have a long way to go down before we achieve that.

Steve Sjuggerud has been giving recommendations and getting slaughtered over the last year.  He tends to buy things that are hated, but his idea of an extreme doesn’t include 10 standard deviation extremes and that’s what’s happening in this market.  Nevertheless, Steve’s track record over many years is still excellent, and I expect him to do well once the carnage is over.

There was another newsletter that ranked really high when I wrote the second edition of Trade Your Way to Financial Freedom.  However, that newsletter doesn’t take profits.  And over the last two years all of the profits that his recommendations had generated have now been wiped out.  In fact, three weeks ago he said that his best recommendation was a stock that they still had a huge profit in.  And he said it was dirt cheap at its current price.  Yesterday, that stock was down about 65% from the level three weeks ago when he said it was the best deal out there.

So what should I do?

In Safe Strategies for Financial Freedom, I recommended several strategies that are appropriate for this market.  The inverse mutual fund strategy would have done very well.  In addition, the Graham’s number strategy is getting to the point where there will be lots of qualifying stocks.  However, that strategy will still lose money if you don’t wait until the market turns around.  For example, I recently bought a stock at $27.50 that had $23 in cash and $119 in total liquid assets.  The cash seemed like a good protector for the stock.  However, it’s now selling at about $20.

Watch my market type indicator and don’t invest until it turns bullish.  And even then keep 25% trailing stops.

What about the advice that I keep hearing that stocks are now bargains and I should hold on if I don’t need my investment soon?  

Interesting,  I heard that advice at the beginning of this year when we were clearly in a downturn.  Now you have to make 100% on your money to break even from those levels.  You are not likely to make 100% any time soon.  In fact, the stock market to the best of my knowledge has never been up 100% in one year.  That’s why 25% trailing stops are the intelligent alternative to buy and hold.  When those are broken, and they were broken a long time ago, you need to get out.

Nothing is a bargain now and I would not consider buying until my market type switches from bear volatile to bullish.  And that’s probably at least three to six months away.  And even that is not indicative of a long term buy.  We could still have another very nasty leg down to this market.

Short term traders (day and swing traders) who have mastered themselves are doing quite well in this market.  Most  are not at that level.

Where do you expect this market to go?

Well I’m not sure what the current PE ratio is on the S&P 500.  Perhaps it’s finally reaching its normal level of 15.  If that’s the case, with the current S&P 500 at 750, you could probably expect another 50% decline from here—at least before we can reasonably expect a bottom to this market.

When you hear the talking heads on television saying that maybe you should sell out, that’s when we’ve probably hit a bottom.  As long as they are saying, “don’t sell at these prices,” we’re near a bottom now… then we are probably a long way away.

How bad can it get?

Well the average American family (who had some wealth) has probably seen their net worth drop by about 50% in the last 12 months.  Part of that is due to the drop in real estate prices and part of that is due to the drop in equities.

However, U.S. banks are in fairly good shape now compared to some European banks with huge exposure to emerging markets in East Europe.  I expect many countries to have a huge problem because they are in worse condition than the U.S., but they cannot borrow.  And many banks in Europe have lent money to those countries.  Right now, in contrast, the U.S. can and is printing all the money it needs and that money is still the world’s reserve currency.

Steel mills are cutting back to 50% capacity or more.  International shipping has dropped 80% or more.  Those effects have not been felt in the economy and in the market yet.  What if the revenues of the major U.S. companies drop 50%?  Then we could see a DOW at 1000-2000.  And at that point, pension funds will be saying they will never again invest in the stock market.

This information is way too negative for me. Can you give me something positive?

I actually agree.  If you start thinking too negatively, then your world will turn upside down.  You attract into your life what you think about.  So here is what I recommend for most of you.

First, consider doing the 365 lessons of A Course in Miracles (ACIM).  You’ll basically learn that all of this stuff about the economy is meaningless because it only has the meaning that you give it.  In addition, you will learn that “Nothing real can hurt me and nothing unreal exists… Herein lies the peace of God.”  Start doing those exercises regularly—get through the first 100 lessons and watch your life change.

Second, listen to the audiobook The Secret.  In fact, listen to it about three times.  When you’ve finished it, then start a gratitude journal and notice how that thinking changes your life.  Rhonda Burne, the author of The Secret, has an excellent gratitude journal.

Third, consider doing the 40 exercises in the Abundance Book by John Randolph Price.  Do those exercises more than once.

Do at least 100 exercises in ACIM, complete a full Gratitude Journal, and do the 40 exercises in the Abundance Book at least three times.  When you do, assuming that it totally changes your thinking, I can pretty much guarantee that your life circumstances will improve dramatically. 

You can get ACIM and the Abundance Book through our web site.  The Secret audiobook and Gratitude Journal you can get at any major bookstore or through amazon.

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.

 

Workshops

Location, Location Location

Phoenix, Arizona, USA

Phoenix, Arizona 

January 30-Feb 1

How to Develop a Winning Trading System That Fits You

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Sydney, Australia 

Sydney, Australia

February 6-8

Blueprint for Trading Success
(note change in workshop schedule)

Sydney, Australia

February 10-12

Peak Performance 101

Sydney, Australia

February 15-18

Advanced Peak Performance 202

Save an Additional $150 with Our Sydney Combo Special

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Trading Tip

Crude Oil Climbs Up the Stairs and Jumps Out the Window, Part III

by
D. R. Barton, Jr. 

I’ve just spent a little over an hour reading articles about oil prices from May and June of this year. It was going to be a much shorter process, but it was so darn amusing that I just couldn’t stop.

Folks argued over whether or not there was an oil bubble. (Since a “bubble” is a made-up concept, there really is no definitive definition.) But there were a very large number of analysts and commentators— some very well respected – who said there was no way we were in a bubble. By then there was a Goldman Sachs research report out predicting $200 per barrel of oil. Plus, more and more folks were putting together compelling stories about true and lasting supply problems. So it’s easy to see why many folks were beginning to think that oil prices were just reflecting a growing scarcity of a commodity under heavy demand.

Two different quotes, one from a think tank and the other from the energy research center of a major university stated that if the summer oil prices were in a bubble, that a pullback to $100 was all that could be expected. Said one, "Even when that bubble pops, you're not looking at $60, $70 oil."

It looks like the pendulum is about to swing all the way to the other end of the spectrum. This past weekend, articles looking for oil below $40 a barrel started to appear. From a technical perspective, we violated a very key support area last Thursday that could lead prices down, as seen in the chart below.

Bear in mind that on most technical indicators, the crude oil market is severely oversold. With that said, if there is no quick pop back up above this $51-52 support zone, then this market could have another capitulation-style move to the downside lurking.

And so we find ourselves at an interesting crossroads. The “peak oil” crowd is standing firm on the assertion that we either have or will soon reach the highest level of oil extraction possible. After which there will be a year-to-year decline in oil production. And $200+ prices. Others maintain that there is plenty of oil in the ground, especially given that extraction technology will continue to improve. In this scenario, prices will moderate between current levels and $100 per barrel.

The next 3 to 5 trading days could reveal the intermediate-term market direction. With the highly oversold market technicals, a failure to bounce significantly higher will set up a capitulation move to the downside. But the more probable near-term move is one to the upside to relieve the over-stretched market condition.

The Barton family is looking forward to a relaxing extended weekend of giving thanks. My hopes and prayers are that you, too, enjoy recounting all of those things you have to be grateful for, whether your country is celebrating a formal Thanksgiving holiday or not!

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”. 

D.R. is presenting the upcoming How to Develop a Winning Trading System That Fits You Workshop, January '09.

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Copyright 2008 the International Institute of Trading Mastery, Inc.

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Happy Thanksgiving!

Feeling gratitude and not expressing it is like wrapping a present and not giving it. ~William A. Ward

The Van Tharp Institute will be closed November 27-28, 2008.

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