Tharp's Thoughts Weekly Newsletter (View On-Line)
Market Condition: Bull Quiet by Van K. Tharp, Ph.D.
September 2012 SQN® Report by Van K. Tharp, Ph.D.
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Market Update for the Period Ending September 30th, 2012 Market Condition: Bull Quiet
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
When a country’s official government debt is greater than its GDP, that country has a problem. Unfortunately, the U.S. has now reached this point. Even worse, the unofficial government debt (which includes unfunded future obligations) is now many times the GDP.
Ron Paul recently said that he first started talking about the U.S. debt when it was 60% of the GDP, and that he’s now too old to do anything about it. That may or may not be true, but it’s a reflection of how deep and difficult the problem has become.
According to the U.S. National Debt clock (www.usdebtclock.org), our National Debt stands at $16 trillion. Federal tax revenue for the year is currently at $2.3 trillion, while spending is at $3.6 trillion—more than a 50% deficit in over-spending. The U.S. trade deficit for the year stands at $792.8 billion.
The average share of the National Debt per family is $700,492, whereas the average family has less than $5,000 in personal savings. The debt clock now tracks U.S. unfunded liabilities as well, and they total $120 trillion—over one million dollars of debt per taxpayer. Do you see any solution for this situation that won’t hurt somehow? Do you understand what I mean by terrible fundamentals?
The debt clock website also shows that the total U.S. population is 314 million. Of that total, 46.9 million people receive food stamps. The nation’s workforce, which currently stands at 142 million people, supports 67.9 million retirees and social security recipients. We’ve also seen 1.3 million bankruptcies and 881,192 foreclosures this year.
I didn’t realize until recently that the U.S. debt clock’s website tracks most data second by second. I’m including the following table so that you can monitor the numbers yourself.
|The State of the United States
||Federal Tax Revenue
||Debt Per Family
||Savings Per Family
It will be interesting to see changes in this data over time. Some of it could go up or down and not make much sense, but I’m just reporting the monthly figures as I see them on the debt clock.
We are now firmly into the part of the year when pension money does not flow into the stock market, so the only game in town right now might be government stimulus money—if it comes. As I mentioned in the mid-month update, we now have QE3, where the Fed buys debt from the banks. To me, that’s just a benefit to the big banks, who own the Fed. But what do I know? It’s a political year, so the party in power will do all it can to stimulate the economy.
Part II: The Current Stock Market Type Is Bull Quiet
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 is now strong bull, while the 100-, 50- and 25-day SQNs are all slightly bullish.
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 quiet. Since bear markets are usually very volatile or at least volatile, we have a little room to go with the current market type. The volatility ETF, VXX, is still very weak.
The next chart shows the level of the three major U.S. indices at year-end since 2004 and at the closing Friday of each week last month.
|Weekly Changes for the Three Major Stock Indices
|Year to Date
Every equity market is now up by at least single digits, and the NASDAQ is up by over 23%, but that’s largely because of AAPL.
Lastly, Jason Goepfert’s Daily Sentiment Report for Tuesday, Oct 2, suggests that smart money is 38% confident in a rally, whereas dumb money is 54% confident. That’s a neutral-to-slightly-bearish picture.
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. There seems to be a deflationary trend in the markets this year, and in a deflationary market, cash is king.
Looking back at the most recent two-month and six-month periods provides the current month's score, given in the table below.
Here is my four-star inflation-deflation model for the last few years and for each month of this year.
September was only the second month in 2012 that showed inflation, but perhaps QE3 is already starting to have an impact.
Shadowstats.com still shows that the real inflation rate is about 5%. Based on those statistics, the GDP showed negative growth in all but one quarter since 2000—which means we've been in a recession for the last 12 years.
Part IV: Tracking the Dollar
Here’s the daily bar chart for the U.S. Dollar Index since mid-March. Look at what's happened since May.
The dollar had a huge and very steep run from below 79 all the way to 84. June was a very volatile, sideways month; it had a range of nearly $1.75 and finished with a huge down candle on the 29th of the month. In July, the dollar took off to new highs but saw a steep decline that continued through mid-September, when it started a two-week rally.
The market is bullish, and I feel pretty good about it for a while. I don’t think any disasters will appear in the short term. Furthermore, volatility is very quiet, and there are a lot of nice trends starting or resuming.
These monthly market updates are not intended for predictive purposes; rather, they’re intended to help traders decide 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.
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September 2012 SQN® Report
There are numerous ETFs that now track everything from countries, commodities, currencies and stock market indices to individual market sectors. ETFs provide an 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 SQN 100 score uses 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
Once again, the SQN world market summary surprised me a little this month. I’m finding it easy to make money, but the overall picture still looks pretty mixed.
Most of the countries are now yellow. We have eight light green countries and only four red ones (China, Japan, Brazil and Chile). Japan replaced India as one of the four worst countries last month.
Six currencies are red (the Brazilian real, British pound, euro, Swiss franc and U.S. dollar). The only thing that looks long is DBV, the currency harvest ETF (so what’s in it to make it look strong?).
Sectors such as biotech, consumer staples, energy, health care, homebuilders, pharmaceuticals, technology, biotech/genome and media are light green. The telecom sector is actually dark green, which makes it one of the highest SQNs in the database right now. The only red sectors are metals and mining and semiconductors.
Generally, bonds are turning light green to yellow as people move out of them, but corporate bonds are still quite strong. The chart below shows the picture at the end of the month.
View Larger Image
The next chart shows commodities, real estate, debt instruments and the top and bottom ETFs for the past 100 days.
Gold, silver and natural gas ETFs moved from red to light green in the last two months. After a number of weak years, natural gas in particular seems to be strong. Coal, oil and steel are still weak among the commodities. Real estate also turned green, suggesting that people feel they can get yield there.
The strongest ETF list shows corporate bonds, U.S. telecom, biotech, etc. at the top. The weakest ETFs are volatility, coal and inverse index funds in general.
The question is: Will these trends last for long? Gold and silver, in my opinion, are the most likely to continue.
What's Going On?
As I’ve said many times over the past few months, the big picture is not that good. Fundamentally, the U.S. economy is the weakest 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 that 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, and little has changed.
Until next month, this is Van Tharp.
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.
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Oct 3, 2012 - Issue 597
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