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  • Article Market Condition: Neutral Normal by Van K. Tharp, Ph.D.
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  • TradingTip July 2012 SQN® Report by Van K. Tharp, Ph.D.
  • Mailbag How Does Van Calculate Market SQN?

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vanMarket Update for the Period Ending July 31, 2012
Market Condition: Neutral Normal

I always say that people do not trade the markets; they trade their beliefs about the markets. Consequently, I'd like to point out that these updates reflect my beliefs. 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, however, your beliefs are not similar to mine, then this information may not be useful to you. 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 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 and readable on our web site), 2) the five-week status on each of the major U.S. stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, and 4) the movement of the dollar. I now report on the strongest and weakest areas of the overall market in a separate SQN® Report. I may come out with that report twice a month if there are significant market charges.—Van K. Tharp

Part I: Commentary—The Big Picture

Nothing has really changed in the big picture. We have a secular bear market, terrible fundamentals, mostly scared individuals, and big funds trying not to look too bad. Each week we wonder which country in Europe might fail and whether Germany will be willing to bail them out to save the Euro.

According to the U.S. National Debt clock (, our National Debt stands at $15.929 trillion. Federal tax revenue for the year is currently at $2.364 trillion, while spending is at $3.632 trillion—more than a 50% deficit in over-spending. The U.S. trade deficit for the year stands at $810 billion. The total debt in the U.S. per family is $684,405, while the average family has less than $5000 in savings. Also, I just noticed that the debt clock now tracks U.S. unfunded liabilities, and they total $119.963 trillion—over one million per taxpayer. Do you see any solution that won’t somehow hurt? Do you understand what I mean by terrible fundamentals?

The debt clock also shows that for this year, we have a work force of 143 million supporting 67.6 million retirees and social security recipients. Out of a total population of 314 million, 46.6 million receive food stamps. We’ve also seen 1.3 million bankruptcies and 919,345 foreclosures this year.

I didn’t realize until recently that the U.S. debt clock’s website tracked most data second by second. I’ve included the following table so that you can monitor the data yourself.

The State of the United States
Month Ending National Debt Federal Tax Revenue Federal Spending Trade Deficit Debt Per Family Savings Per Family


July 31 2012 $15.93 trillion $2.364 trillion $3.632 trillion $810 billion $684,405 $4,854 1,298,313 919,346

It will be interesting to see changes in this data over time.

We are now firmly into the annual period when pension money is not flowing into the stock market, but government stimulus money might be able to help, if it comes. We’ll see. It’s a presidential election year, so the party in power will do all it can to stimulate the economy.

Part II: The Current Stock Market Type Is Neutral Normal

Each month, I look at the market SQN® score for the daily percent changes in the S&P 500 Index over 200, 100, 50 and 25 days. For our purposes, the S&P 500 Index defines the market. The 200-day SQN, the 50-day SQN and the 100-day SQN are all slightly bullish. But the 100-day is neutral and spent some time in bear territory during July.


Here’s a weekly candlestick chart of the S&P 500. We’ve been in an uptrend since mid-May, which is why the short-term market type measures are bullish.


The next graph shows that the volatility is still normal. It seems to be quieting down. And since bear markets are usually very volatile or at least volatile, we have a little room to go. The VXX is still very weak.


The next chart shows the activity of the three major U.S. indices at the closing of each Friday.

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% 1,211.65 -41.89%
Close 09 10428.05 18.82% 1,115.1 23.45% 1,860.31 53.54%
Close 10 11,577.51 11.02% 1,257.64 12.78% 2,217.86 19.22%
Close 11 12,217.56 5.53% 1,256.60 -0.08% 2,277.83 2.70%
29-Jun-12 12,880.09 5.42% 1,331.85 5.90% 2,536.65 11.36%
06-Jul-12 12,772.99 -0.83% 1,367.58 2.68% 2,612.29 2.98%
13-Jul-12 12,777.09 0.03% 1,334.76 -2.40% 2,584.97 -1.05%
20-Jul-12 12,822.57 0.36% 1,376.51 3.13% 2,618.04 1.28%
27-Jul-12 13,075.66 1.97% 1,360.02 -1.20% 2,647.03 1.11%
Year to Date 13,008.68 6.48% 1,360.02 8.14% 2,647.03 16.21%

The market is now up by at least single digits in every market.

Lastly, Jason Goepfert’s Daily Sentiment Report for Friday, July 31st suggests that both smart money and dumb money are 50% confident in a rally. That’s a pretty neutral picture, which coincides with our market type.

Part III: Our Four Star Inflation-Deflation Model

In the simplest terms, inflation means that stuff gets more expensive, and deflation means that stuff gets cheaper. There’s a correlation between the inflation rate and market levels, so the inflation rate can help traders understand big-picture processes. Right now, we seem to have a deflationary trend. Commodities are way down, and the last two months have strong deflationary trends—and in a deflationary market, cash is king.

Here is my four-star inflation-deflation model for the last few years.

Date CRB/CCI XLB Gold XLF Total Score
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  
Dec 11 564.37 33.50 1,574.59 13.00  
Jan 12 589.00 37.18 1,744.00 14.06 0
Feb 12 600.32 36.97 1,724.60 14.76 -0.5
Mar 12 572.94 36.97 1,662.57 15.80 +1.0
Apr 12 558.55 36.67 1,651.25 15.43 -2.5
May 12 508.76 33.82 1,606.00 14.00 -3.5
Jun 12 539.66 35.29 1,598.50 14.64 -2.0
Jul 12 560.88 34.84 1622.00 14.66 -1.0

Looking back over the most recent two-month and six-month periods provides the current month's score, given in the table below.

July 2012 CRB
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
Total Score
Current Level Higher Lower Higher Higher Higher Lower Higher Higher  
Score   -1/2   +1   -1/2   -1 -1.0

Right now, we still seem to be in the deflationary scenario that’s been going on for the last four months. However, the numbers are starting to turn up. Only one month out of seven since the beginning of 2012 has shown an inflationary tendency. still shows that the real inflation rate is about 5%. Based on those statistics, the GDP has shown negative growth since 2000 (meaning recession) in all but one quarter of 2003.

Part IV: Tracking the Dollar

Look what has happened to the U.S. dollar since May. It’s had a huge and very steep run from below 79 all the way up to 84. June was a very volatile sideways month with a range of nearly $1.75, finishing with a huge down candle on the 29th of the month. July took off to new highs but saw a steep decline at the end of the month. Will we see the same tendency next month?


I’m not as worried about the near-term future of the market this month as I was last month. Three of the four period SQN market types say bull, and volatility has been decreasing slightly. Furthermore, the sentiment indicators are all neutral. I think this is the time, not to jump into the market, but instead to use systems that work in sideways markets. Again, the best strategy is probably to be a short-term trader.

These monthly market updates are not intended for predictive purposes; rather, they’re intended to help traders figure out which of their trading systems should work best in the current market conditions. In bear markets—which are almost always volatile by nature—shorter-term strategies, and those that allow going short, tend to work better than long-only or intermediate/longer-term systems.

Which of your trading systems fit this current market type? Of course, this question implies that you have multiple trading systems and that you know how they perform under various market conditions. If you haven't heard of this concept or the other concepts mentioned above, read my book Super Trader, which covers these areas and more, so that 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 were lots of good opportunities in 2011 and, so far, many more in 2012. 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.


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


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Trading Tip

July SQN® Report

There are numerous ETFs that now track everything from countries, commodities, currencies and stock market indices to individual market sectors. ETFs provide a wonderfully easy way to discover what’s happening in the world markets. Consequently, I now use the System Quality Number® (SQN®) score for 100 days to measure the relative performance of numerous markets in a world model.

The Market SQN 100 incorporates the daily percent change for a 100-day period. Typically, an SQN score over 1.45 is strongly bullish; a score below -0.7 is very weak. We use the following color codes to help communicate the strength or weakness of the ETFs.

  • Green: ETFs with very strong SQN scores (0.75 to 1.5).
  • Yellow: ETFs with slightly positive SQN scores (0 to 0.75).
  • Brown: ETFs with slightly negative SQN scores (0 to -0.7).
  • Red: Very weak ETFs that earn negative SQN scores (< -0.7).

The world market model spreadsheet report below contains most currently available ETFs, including inverse funds, but excluding leveraged funds. In short, it covers the geographic world, the major asset classes, the equity market segments, the industrial sectors and the major currencies.

World Market Summary

The SQN world market summary hasn’t changed much since last month. I did the monthly update first and was surprised to learn that only the Market SQN 100 was neutral, while all the other periods were slightly bullish. The world market model is also based on the SQN 100, but it doesn’t look that good.

Most of the model looks really bad, except for a few rays of sunshine in the U.S. markets. Eight countries (like last month) are red, six currencies are red, and six commodities are red. No countries or commodities are green, and only one currency—the Japanese yen—is light green. For me, it’s nice to get this perspective, because after writing the monthly update, I was wondering if it was time to look for buying opportunities. The world situation, however, is pretty dismal.

There are a few light green areas, including various debt instruments, consumer staples, health care and biotech. Utilities are solid green.

The strongest countries are Australia, Singapore, Belgium, Mexico and the United States. People are still fleeing to yield. A lot of money seems to be moving into debt instruments, even though yields are extremely low.

The chart below shows the picture for countries, industrial sectors, currencies and U.S. market segments at the end of the month.


View Larger Image

What we see happening again in this secular bear market reflects what I’ve been talking about for some time: Trends don’t last very long. Consequently, you need to be a trader, not an investor. You need systems that make money over days or a few weeks, not months or years.

The next chart shows real estate, debt instruments, commodities and the top and bottom ETFs for the past 100 days.


Most commodities are now red, with silver, base metals and oil being the hardest-hit sectors. For a change, natural gas is no longer negatively rated. Real estate is yellow, which suggests that people feel they can get yield there.

The weakest ETFs are generally energy- or commodity-related, while the strongest seem to be debt instruments and yield.

What's Going On?

As I’ve been saying for many months, the big picture is not very good. Fundamentally, the U.S. is in the worst shape it’s been in a long, long time. Our debt looks asymptotic and the dollar (despite its rise to the upside) could soon be dismissed as the world’s reserve currency. China isn’t doing too well either, and as a result, it is no longer buying up the world’s supply of commodities. This is almost exactly what I said last month, so little has changed.

Crises always offer opportunities, but to capture those opportunities you MUST know what you are doing. If you want to trade these markets, you need to approach them as a trader, not a long-term investor. We’d like to help you learn how to trade professionally. Trying to navigate these markets without an education is hazardous to your wealth.

All the beliefs given in this update are my own. Though I find them useful, you may not. You can only trade your beliefs about the markets. Until next month, this is Van Tharp.


How Does Van Calculate Market SQN?

Q: I am looking for the calculation method of the SQN applied for an index so that I can use it to calculate other indices besides the SP500. I see that there's information about SQN in The Definitive Guide to Position Sizing Strategies book, but will that information help me use the formula the way I want to?

A: Because Van trademarked SQN and considers it proprietary, we don't write about the calculation in our newsletters or publish it on the website. As you mentioned, Van explains the SQN formula and its use in his book The Definitive Guide to Position Sizing, and we teach it at two of our workshops—Blueprint and Systems Development. He also talks about SQN in his book Super Trader but doesn't discuss its calculation.

Van didn't write about the "Market" SQN in Definitive Guide because he developed that particular application after the book was published. However, he does explain how he generally applies the SQN formula to the market here.

First, he finds the daily percentage changes from close to close for 100 days in the S&P.  Then, he calculates both the average daily percentage change over the period and the variation for the period.  A high average and a low variation will have the best Market SQN score (strong bull or bull), and a negative average with high variation will have the worst Market SQN score (strong bear or bear). 

If you have the daily data, it is fairly easy to have Excel calculate the Market SQN for you. You could use a spreadsheet to monitor the Market SQN for major asset classes on a weekly basis, which can help you keep up with your big picture.

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