Tharp's Thoughts Weekly Newsletter (View On-Line)

  • Article July 2011 Market Update—Market Condition: Bear Normal by Van K. Tharp, Ph.D.
  • Trading Education 2011 Fall Workshop Schedule
  • Trading Tip July 2011 SQN® Report by Van K. Tharp, Ph.D.
  • Mailbag Adopting Someone Else's Beliefs

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Market Update for the Period Ending July 31, 2011
Market Condition:
Bear 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: Commentary—The Big Picture

This month a member of my staff asked me, “What is the economy going to do? Is it going to fall apart?” The answer is definitely “Yes!” When this will happen depends on the US debt. It is going up as an asymptotic curve. Like the stock market in 1999, anything that goes up like that must come crashing down. This collapse will have both domestic (e.g., the stock market) and international (e.g., the US dollar) implications. While the major credit rating firms all rate the US debt at AAA, Martin Weiss (who has no vested interest in the impact of his ratings) gives the US debt a rating just above junk status. One firm downgraded the US debt to AA and the other two major ratings firms are AAA with negative warnings—one even giving a threat to downgrade without some major improvement.

The US Senate just ratified an emergency bill to pass a new debt ceiling. However, the bill was not what Obama wanted and it comes with strings attached requiring a special Congressional Committee. Warren Buffet was right when he said this problem is easy to solve. Just make sure that every member of Congress or the Senate is ineligible for reelection if the US does not have a balanced budget or better during their watch.

Part II: The Current Stock Market Type Is Bear Normal

Each month I look at the market SQN score for the daily percent changes over 200, 100, 50 and 25 days. For our purposes, the market is defined as the S&P 500 Index. The 50- and 100-day are both in Bear mode. The 25-day is neutral and the long term 200-day is still bullish, but only just. Below is the graph of the 100-day market SQN score for the last year showing us in Bear Mode. And the trend is pretty obvious—down—with a base oscillating between bear and neutral.

chart 1

The next graph shows market volatility over the last year.

chart 2

You can see that we are in normal volatility territory after a slow steady rise out of the quiet volatility zone back in April. With normal volatility, the market SQN 100 could easily slip further into bear territory. However, unless volatility spikes, we will stay out of bear volatile or strong bear. Bear volatile and strong bear periods are the worst conditions for those long in the markets.

Here are the performance figures for the three major US indices over the last month.

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 -0.60% 1,248.29 3.07% 1,645.20 1.50%
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%
Close 08 8776.39 -33.84% 903.25 -38.49% 1211.65 -41.89%
Close 09 10428.05 18.82% 1115.1 23.45% 1860.31 53.54%
Close 10 11,577.51 11.02% 1,257.64 12.78% 2,217.86 19.22%
30-Jun-11 12,414.34 7.23% 1,320.64 5.01% 2,325.07 4.83%
8-Jul-11 12,657.20 1.96% 1,343.80 1.75% 2,405.89 3.48%
15-Jul-11 12,479.73 -1.40% 1,316.14 -2.06% 2,356.67 -2.05%
22-Jul-11 12,681.16 1.61% 1,345.02 2.19% 2,429.50 3.09%
29-Jul-11 12,143.24 -4.24% 1,292.28 -3.92% 2,362.81 -2.75%
Year to Date 12,143.24 4.89% 1,292.28 2.75% 2,362.81 6.54%

The indices were up heavily the first week in July and have been in a slow downturn since that time. The acceleration down was quite strong for the last week of July.

Part III: Our Four Star Inflation-Deflation Model

Here is the data from our four star inflation-deflation model.

Date CRB/CCI XLB Gold XLF
Dec-05 347.89 30.28 513.00 31.67
Dec-06 394.89 34.84 635.50 36.74
Dec-07 476.08 41.70 833.30 28.90
Dec-08 352.06 22.74 865.00 12.52
Dec-09 484.42 32.99 1,104.00 14.10
Dec-10 629.53 38.47 1,410.25 16.00
Jan-11 650.80 39.47 1,327.00 16.74
Feb-11 676.96 39.46 1,411.00 16.85
Mar-11 672.81 40.02 1,439.00 16.52
Apr-11 687.66 40.87 1,535.50 16.38
May-11 656.42 39.75 1,536.50 15.84
Jun-11 632.23 39.37 1,500.30 15.35
Jul-11 645.77 38.01 1,628.50 14.80

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
   Lower Lower Lower Lower Higher  Higher Lower Lower  
July    -1    -1    +1    +1 0

We are still in an inflationary environment—and gold is setting new highs, which basically shows that we are in a crisis mode. Inflation could remain tame unless or until the banks start lending again.

Speaking of bank lending, the money multiplier situation stayed weak last month. The St. Louis Federal Reserve still shows the downtrend continuing with the money multiplier at below 0.75. This means that banks are lending $75 for every $100 they have. The historic norm is about 3.0, so you can see how serious this really is.

chart 3

The longer the money multiplier stays below zero, the greater the compounded effect on the economy as businesses have less access to capital.

Part IV: Tracking the Dollar

Rather than depend on the Federal Reserve to report figures, let's look at the US Dollar Index futures price chart to see what is really going on.

chart 4

So far, the dollar has had higher highs off of its May 4 low, but it’s not that far off right now at 74.319. We had actually thought about doing next year’s European workshops in Switzerland; however, the Franc is the strongest currency right now which would make the workshop expensive for everyone that wanted to attend. One US dollar is now about 1.3 Swiss francs. (When I went to a health clinic there in 2004, the dollar was worth about 1.4 Swiss Francs.) While I was in Europe in June, the Euro was in a crisis mode with Greek debt being the major topic; however, the Euro recently has remained about even with the US dollar.

General Comments

The current equity market slide and rise in gold, US Treasuries, and strong currencies indicate that institutions are pulling money out of risk's way and moving it towards safer areas. The so-called aversion of the national debt ceiling crisis in Washington this week makes absolutely no difference in the big picture the huge US debt load continues to grow.

I personally believe that the secular bear market has at least 5-10 more years to run. Shadowstats.com (with accurate statistics) only shows one quarter in which the US hasn’t been in a recession since 2000 (4th quarter of 2003). And if Oneness becomes global, then the big money game as it has been practiced for many years has to end. Most would consider this a disaster; however, it is essential for Oneness.

You should use the information in these monthly updates to determine which trading systems will work best rather than try to forecast the market. Which of your trading systems fit the current market type? The question implies that you have multiple trading systems and that you know how they 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 conditions.

Crisis always implies opportunity. Those with good trading skills can make money in this market—a lot of money. There have been lots of good opportunities in 2011. 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 August update, this is Van Tharp.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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.vantharp.com.  


Trading Education

2011 Fall Workshop Schedule

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van

Trading Tip

July 2011 SQN® Report

I use the System Quality Number® (SQN) score to measure the market performance of countries, currencies, commodities, and various equity sectors in this world model. The specific calculation I use is the SQN 100, which calculates the SQN score of the daily percent change for a 100-day period of various ETFs. Typically, a score over +1.45 is strongly bullish and a score below -0.7 is very weak. The following color codes to help communicate the strength or weakness of the ETFs I track:

  • 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).

The World Market Model spreadsheet below includes most currently available ETFs—including inverse funds but not leveraged ETFs.

World Market Summary for July

The predominant color in July for US market segments (top center) is brown, which is weaker than last month (and last month was weaker than the prior month). Brown is a negative sign according to the model.

As we compare the US market segments to the rest of the world, we don’t see much strength in the other regions either. Europe is brown. Other countries in the Americas are brown. And even most of the sectors are now brown, with a few turning red.

There are only three green countries in the model: Singapore, South Korea, and Thailand and these are a different trio of countries than last month. So this tells us that in the last 100 days, the markets around the globe have shown a general weakening. Now is the time to get defensive with your portfolios. The ONLY encouraging sign is that volatility is neutral, which is unusual in a bear market.

sqn 1

The Swiss Franc continues to remain the strongest currency among a group of weakening currencies. However, currencies are generally strong (green or yellow) with the exception of the US dollar. This is another reason to seek protection in your investment portfolio if it is dollar based.

As a group, the industrial sectors’ strength is waning compared to last month. We can find some remaining strength with Biotech (like last month), Consumer Staples, and Pharmaceutical, which are the only green areas. Most sectors are now yellow, brown or red. The next table shows the relative performance of commodities, real estate, and interest rates, plus the strongest and weakest areas of the all of the ETFs.

Gold is the strongest area of the commodities and it continues to hit new highs. Bonds are also strong across the board (except for Junk Bonds) as people flee to safety. However, this could be a sad place to be if the US debt gets downgraded; it certainly is not a wise place to be.

All the real estate sectors are yellow but generally very weak.

The top ETFs are the Swiss Franc, the inflation protected bond funds, and municipal bond funds. I cannot understand why as I would not be putting my money into bonds right now.

The worst performing funds include financials, banks, wireless, brokers, networking, and internet ETFs.

sqn 2

What’s Going On

It is the same old story of unsound governments overspending so much so that they are in serious jeopardy of a default. And the US is one of those countries—although our default may take some time.

QE2 is complete, and we simply have a bandage on the US debt. This week’s passage of a bill to raise the debt ceiling was an internal matter and our politicians almost blew it anyway. The world doesn’t trust the US, but it is still the world’s largest economy and the world depends upon it. And the European economy and Japan are not in any better shape.

Regardless of where the money flows in the short term, if you want to be in this market, it should be as a trader rather than a long term investor. The markets are in crisis mode and there is always opportunity with these kinds of circumstances. But to be a trader and capture the crisis opportunities, you MUST know what you are doing. That’s our job if you’ll let us educate you. But to try to navigate these markets without such an education is hazardous to your wealth.

Until next month, this is Van Tharp.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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.vantharp.com.  


Mailbag

Adopting Someone Else's Beliefs

Q: In regard to finding a system that suits me, can’t I adopt someone else’s winning beliefs? I don’t wish to hold any market beliefs that are not useful to me. Whatever I have done in the past trading-wise has not worked, so why would I bother holding onto those beliefs?

A: Taking on the beliefs of someone else, regardless of how well those beliefs work for them, may not work out well for you. If you choose to adopt someone else's beliefs, you need to look at each of these belief with the Belief Examination Paradigm (we will go through a few examples of this in the upcoming Peak 101 Workshop) to determine whether or not each belief is truly useful for you.

To trade well, you actually have to consider three sets of beliefs:

  1. Beliefs about yourself.
  2. Beliefs about the market.
  3. And beliefs about systems.

You will find success trading a system that lies at the intersection of three sets of beliefs.

It already seems like you are comfortable with getting rid of your nonuseful beliefs. However, if you find that any of these non-useful beliefs have charge on them, you have to release the charge (we also will do this in Peak 101) before you can change the belief.


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August 3, 2011 - Issue 537

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