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Market Update for the Period ending April 1, 2011
Market Condition: Bull Normal
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 point out that these updates reflect my beliefs. If my beliefs and your beliefs are not the same, you may not find them useful. I find the market update information useful for my trading, so I do the work each month and am happy to share that information with my readers.
If your beliefs are not similar to mine, then this information may not be useful to you. Thus, if you are inclined to perform 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. Know that I acknowledge that these are my beliefs and that your beliefs may 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 type (first mentioned in the April 30, 2008 edition of Tharp's Thoughts), 2) the five week status on each of the major US stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, and 4) tracking the dollar. Beginning this month, I will now report on the strongest and weakest areas of the overall market as a separate SQN® Report. And that may come out twice a month if there are significant market charges.
Part I: Van's Commentary—The Big Picture
During the month I’ve been gone, we’ve had some strong down moves. Now, I’m seeing a lot of newsletters talk about the next bear market. True, we’re in a secular bear market and the fundamentals behind the market are not strong at all right now. However, the Fed is still printing money and the banks are not lending, so it’s going into the stock market. And we’re still in a bull market.
While the market SQN™ has been a down trend, it is important to note that we are still in a bull market and those have not been the normal since 2000. Enjoy it while it lasts.
Part II: The Current Stock Market Type Is Now Bull Normal
Each month I look at the SQN score for the daily percent changes over 200, 100, 50 and 25 days. On April 1, the SQN scores for 200 and 100 days were both in the bull range, but the SQN calculations for 50 and 25 days had moved into the neutral range. The graph below shows a chart of the SQN 100 calculation over the last year.
The 100-day SQN has been weakening since early in the year and currently, we are in the middle of the bull range.
The next graph shows market volatility.
You can see that, since late May last year, the trend was towards lower and lower volatility. It started to pick up around the first of the year, and it almost reached volatile territory before it started moving down. I’m not really worried about a strong market downturn until we get into the volatile range.
Jason Goepert’s sentiment newsletter suggests that dumb money is 67% confident whereas the smart money is 46% confident. He believes this is a moderate warning signal for a market downturn.
Here are the performance figures for the three major indices over the last month. All of them are up nicely. The DOW and S&P 500 only had one negative week last month, while the NASDAQ 100 had two down weeks.
|Weekly Changes for the Three Major Stock Indices
|Year to Date
Part III: Our Four Star Inflation-Deflation Model
Here is the data from our four star inflation-deflation model.
We'll now look at the two-month and six-month changes during the last six months to see what our readings have been.
All but one of the measures was higher last month, so unless we have another massive derivatives collapse, we are in an inflationary environment. That inflation could remain subdued, however, unless or until the banks start lending again and then it could become interesting.
Shadowstats.com estimates the M3 money growth is about -1%, which is up from -3% two months ago. The St. Louis Federal Reserve still shows that the banks are not multiplying printed money. The current money multiplier is at 0.77—that’s the lowest I’ve seen it. Notice the sharp downturn that began earlier this year.
Part IV: Tracking the Dollar
The next table shows the US tracking of the dollar index through February.
Again, the Fed is behind in posting the dollar data, so we’ll look at a futures chart of the US Dollar Index instead.
This month, the dollar bounced up a little and then came back down. I was traveling, so, as expected, the US dollar continued to fall. (Long time readers have read about the Tharp Effect: the US dollar seems to weaken every time I travel internationally.) On my trip to Australia last month, I stayed in Thailand for a few days on my way over and on the way back. When I first arrived in early March, I could get over 3000 Thai Bhatt for my $100; by my return trip in late March, it had dropped to about 2995. And the US dollar is lower than both the Canadian and Australian dollars. That’s not great for US travelers.
We’re in a secular bear market, which means a long term and dramatic reduction in valuations. Eventually, we can expect to see S&P 500 PE ratios in the single digits. Fundamentally, conditions certainly seem to support that trend even though the economy can actually do quite well in some secular bear markets.
The market has come down from the strong bull range to the bull range while the volatility has moved up from quiet to normal. Normal is adjacent to volatile and if we get into the volatile range, things could get interesting. I see a lot of newsletter saying that the next bear is just around the corner, but those are simply predictions. When we see the market SQN scores reach the bear range, then I’ll call it a bear market.
Once again, it’s my opinion that you should use the information in these monthly updates to discern when to switch trading systems and not to forecast the market. This is why it’s imperative that you know how your system will perform under various market conditions. If you haven't heard this before or the other ideas mentioned above, read my book Super Trader, which covers these areas and more so you can make money in any kind of market.
Crisis always implies opportunity. Those with good trading skills can make money in this market—a lot of money. There were lots of good opportunities in 2009. Did you make money? If not, then do you understand why not? The refinement of good trading skills doesn't just happen by opening an account and adding money. You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Financial market trading is an arena filled with world class competition. Additionally and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment, and the right training. Until the April update, this is Van Tharp.
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March 2011 SQN™ Report
I now use the System Quality Number ® score or SQN™ score to measure the market performance of countries, currencies, commodities, and various equity sectors in my world model. I use the SQN 100, which calculates the SQN score of the daily percent change for a 100-day period of the various ETFs we follow. Typically, a score over +1.45 is strongly bullish; a score below -0.7 is very weak.
- Green (strongest): Those ETFs with scores that are more than one standard deviation above the mean (about 1/6 of the ETFs scanned).
- Yellow (the next strongest): Those ETFs with scores above the mean up to one standard deviation (about 1/3 of the ETFs scanned).
- Brown (weak): Those ETFs with scores within one standard deviation below the mean (about 1/3 of ETFs scanned).
- Red (very weak): Those ETFs with scores more than one standard deviation below the mean (about 1/6 of the ETFs scanned).
My model includes most ETFs currently available but I do not include any leveraged ETFs.)
World Market Summary
Once again the US markets look very strong. Look at the top center box. All ten market segments of the US stock market are green, but the indices are no longer over 2.0. I didn’t have a reading for QQQ because I forgot to change the symbol from QQQQ (why do they do that?).
Now compare the US Market scores with the rest of the world and notice the disparity. The US market strength really surprises me because the US dollar is weak, the housing situation is getting worse, and banks are not lending money. Enjoy this market while it lasts.
The only other country with a SQN® score above 1.0 is Russia. Japan was relatively strong a month back, but you know what happened on March 19th. My only Super Trader from Japan is thankfully safe and actually here in North Carolina right now. He lives near Tokyo Disneyland and has been dealing with having electrical power on for just 3 hrs at a time. He also said the public was being told that water and vegetables were slightly radioactive, but not to worry about it. What is slightly radioactive?
As an industrial sector, energy still dominates everything else. Many US sectors also dominate their global counterparts, and they are the same sectors as last month. The three strongest are Energy, Oil and Gas Exploration, and Oil and Gas Equipment. The Semiconductor Industry grew weaker. But again, it’s nice to see trends persist for a while.
Chile, China, India, Hong Kong, Singapore and Brazil all look very weak. The British Pound, Japanese Yen, the Chinese Yuan, and the US dollar are all looking weak.
The next table shows commodities, real estate, and interest rates, plus the strongest and weakest areas.
The top 15 ETFs are all Energy ETFs with one exception: health care. Remember last month when I asked if you had exposure in energy? Or were you waiting for the top to get in? Either way, this simply illustrates the importance of psychology. Work on yourself first; then you can respond to what the market is doing.
The bottom five ETFs, as last month, are all US short funds.
Most of the commodities are green; however, only Silver shows good strength. As usual, the one weak commodity is natural gas. Again, I ask, why is coal and oil strong, but gas weak?
Nothing looks that good in the real estate sector. And, finally, as we’ve been saying for several months, all of the bond funds, except junk, are very weak.
My Interpretation of What Is Going On
The Federal Reserve is printing money like crazy and the banks are not lending it. Instead, it’s probably going into the stock market. The bond bubble burst and that money has also been flowing into the stock market. Those inflows are holding up the stock market.
It is a crazy world.
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Can I Make 10K a Day?
Q: Do your Super Trader clients use R-multiples, expectancy and position sizing® strategies in their everyday trading? Second, I am starting with minimal capital and have a goal of making a $1,000 a day, which I feel is doable in time. However, I would like to know if it is possible to make $10,000 a day once the account is built up to the appropriate amount?
A: Our Super Trader clients use all of the Tharp Think principles and have to prove they understand them well in order to complete the program.
How much you can make in a day of trading depends on many variables: your starting capital, your trading systems, your position sizing strategies, your risk tolerance, your personal abilities, your commitment, your objectives, your planning, your discipline, etc.
Is it possible for a top trader to make $1,000 or $10,000 a day? Is it possible to play consistently at or below par on the golf course? Yes to both questions. That being said, making those kinds of returns could be more challenging and time-consuming than a rookie might ever imagine. Are you passionate about the practice of personal development and trading excellence? Are you committed to working on yourself diligently and working on becoming an outstanding trader—even if that process takes many years? If so, you might be able to become a top trader—but you might not realize $1,000 or $10,000 for years. Your passion and commitment are crucial. The chance at making big money tends to stimulate a lot of people in the short term but provides insufficient fuel to stay the course of personal and trader development for the years that are typically required.
Everything that we do here at the Van Tharp Institute is focused around helping you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative!
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April 6, 2011 - Issue 520
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