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Market Update for the Period Ending August 2, 2013

Market Condition: Bull Quiet

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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 changes.—Van K. Tharp

Part I: Commentary—The Big Picture

In June, the market went from strong bull to neutral quite quickly and I sent out a market warning in the newsletter at the end of June.  That was almost the exact end of the decline.   Since then, the market has recovered from its recent lows and gone on to make new highs.  It is now bull quiet so there is plenty of opportunity to profit on the long side again.

Fundamentally, I expect interest rates to keep rising and accelerate their rise later this year.   The Federal Reserve has already stated that they’d stop their massive infusion of money into the market (which they do by purchasing as much as 85 billion dollars in debt each month).   These conditions remind me of the stock market in 1999 when PE ratios were ridiculous and prices were going up 50% per month with ATRs of 25% of the price or more.   As I continued to wonder how long it would go up, waiters and bartenders acted like their true calling was investing.

Today, something else is going up and I wonder how long it will rise.  It has surprised me to no end that about thirty years after the official U.S. debt reached one trillion dollars under Ronald Reagan, it has only been going up since.  In fact, it is now going up a trillion dollars every year and totals nearly $17 trillion.   Our unofficial debt is over $100 trillion.   We are the largest debtor nation in the history of the world;  50 years ago, we were the largest creditor nation in the world.  Furthermore, the debt situation is so bad that the Federal Reserve had to drive short-term interest rates to almost zero and long-term rates to very low numbers.   This is killing the U.S. dollar and interest rates have nowhere to go but up.   In fact, betting on interest rates eventually rising is about as close to a no risk trade (long-term) as you might ever be able to make.

According to the U.S. debt clock, our national debt stands at $16.89 trillion.   In June, it went up $50 billion, but didn’t change much last month.   The U.S. population remains at 316 million with the number of taxpayers standing at 113.9 million.   Retirees now total 47.17 million.   That’s up half a million people in one month.   Disabled people collecting social security benefits stands at 14.36 million while food stamp recipients total 47.88 million (down from last month, surprisingly) so that’s 109.9 million people that are supported either by the government (which means the 113.9 million taxpayers).   This means that 113.8 million workers are supporting 109.9 million other people through the government.   I have mentioned before, however, that 90% of U.S. taxes are paid by the top 11 million taxpayers.  Do these numbers add up to you?  Do they seem sustainable?

Here’s the update for some figures from the debt clock website so you can watch the changes over time.  Some of the figures vary from month-to-month and may not make total sense — those variations, however, tend to be relatively small.  Besides, when you get into the trillions, rounding to the nearest ten billion mark just makes sense. 

The State of the United States

Month Ending

National Debt

Federal Tax Revenue

Federal Spending

Trade Deficit

Debt Per Family

Savings per family

Workforce (taxpayers)

People supported by them

July 31 2012

$15.93 trillion

$2.364 trillion

$3.632 trillion

$810 billion

$684,405

$4,854

 

 

Aug 31 2012

$16.00 trillion

$2.374 trillion

$3.585 trillion

$797 billion

$683,397

$4,784

 

 

Sept 30 2012

$16.08 trillion

$2.367 trillion

$3.645 trillion

$793 billion

$700,492

$4,727

 

 

Oct 31 2012

$16.04 trillion

$2.426 trillion

$3.550 trillion

$776.6 billion

$702,824

$4,667

 

 

Nov 30 2012

$16.17 trillion

$2.438 trillion

$3.545 trillion

$741.3 billion

$705,249

$4,607

 

 

Dec 30 2012

$16.42 trillion

$2.452 trillion

$3.540 trillion

$740.7 billion

$732,086

$5,789

 

 

Jan 31
2013

$16.50 trillion

$2.495 trillion

$3.541 trillion

$740.9 billion

$732,611

$5,725

 

 

Feb 28 2013

$16.66 trillion

$2.494 trillion

$3.540 trillion

$728.2 billion

$733,045

$5,672

 

 

Mar 28 2013

$16.75 trillion

$2.51 trillion

$3.569 trillion

$723.7 billion

$745,862

$7,611

 

 

Apr 30 2013

$16.83 trillion

$2.53 trillion

$3.580 trillion

$1,045 billion

$747,282

$7,779

113.7 million

108.4 million
95.3%

May 31 2013

$16.84 trillion

$2.57 trillion

$3.588 trillion

$707.6 billion

$748,828

$7,963

113.7 million

108.4 million
95.3%

Jun 30 2013

$16.89

$2.57 trillion

$3.589 trillion

$706.4 billion

$747.867

$3,314

113.9 million

108.8 million
95.6%

July 31, 2013

$16.89

$2.73

$3.535 trillion

$703 billion

$748,458

$3,242

115.2 million

109.9 million
95.4%

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 periods of 200, 100, 50 and 25 days. For our purposes, the S&P 500 Index defines the market and I use the 100-day period to determine the market type.    

The market SQN score for 200 days and 25 days are both strong bull.   The market SQN for 100 days is bull while the 50 day score is neutral.  To me, this is a very strange combination of readings.   

The first chart is a weekly bar chart of the S&P 500 with the last bar being only two days.  Notice the beautiful long term uptrend, the recent pullback and subsequent recovery.

(to see the three following charts stacked and aligned, click here)

chart3

The next graph shows the market SQN 100 score.   The reading is currently 1.30 (0.7 is neutral).   

chart4

Lastly, let’s look at the market volatility.   Market volatility has moved from high in the normal range in mid-June all the way back to quiet which suggests that we could be bullish again for some time in the future.

chart5

(to see the three previous charts stacked and aligned, click here)

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

chart6

All three indices show solid gains for the year, all being up by 20% or more.   20% is usually a good year in itself, however, what impact will the Fed buying $85 billion in debt each month have on the dollar?   My guess is that we will need a lot more than 20% gains to balance out the effects of the Fed’s actions.    

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 looking at the inflation rate can help traders understand big-picture processes.  

For some reason, the CRB:CCI index seems to have been discontinued on April 17th.   As a result, I switched to the ETF called DBC to look at commodity prices in the model. I’ve kept the prior years’ CCI data (from 2005 to 2012) as a reference since the DBC data does not go back that far.

chart7

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

Month

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

 

Higher

Lower

Higher

Higher

Lower

Lower

Higher

Higher

 

Mar-13

 

-1/2

 

 +1

 

-1

 

-1

-1.5

This data still suggests deflationary pressure.  Five out of the seven months in 2013 have had deflationary data.  Again, I elected to look at the shadowstats.com data on inflation which continues to show real inflation at about 5%, compared with government figures at about 2%.  

The Fed has been trying hard to stoke inflation and even though it has nearly doubled the M1 money supply since 2008, it has met with limited success .  Part of the reason lies in how the banks are using (or not using) the “extra” money the Fed has been pumping into the financial system.  Since the financial crisis, banks have been less willing to lend while businesses and consumers have been less willing to borrow money - even in this “recovery”.  When banks lend out more than they take in or have, there is an inflationary money multiplier effect.  Banks, however, are lending far less than they could which shows up on the chart below as a money multiplier less than 1 — which has a deflationary effect on the economy.  The money multiplier has been well below 1.0 since 2009 and in 2013, it has been heading down, not up.

chart8

(to see a larger version of this graph, click here)

Part IV: Tracking the Dollar

In May, the dollar had a fairly strong surge, moving above 84, however, it moved lower in mid-June touching 81.   Then it went nearly to 85 early in July only to head back down again.  Right now it is at 81.9.   Forex is a great market to trade right now with huge volatility and lots of opportunity for profit.

chart9

General Comments

With the fundamental conditions we have in place, the market is a real crap shoot unless you trade short-term with lots of low-risk ideas.  Investors, however, can probably remain long so long as the market type is in bull quiet mode.   At some point in time, the Fed will have to end their buying program, interest rates will start to skyrocket, and equities will crash.   But who knows when that will happen?  It could be this month or the market could go back to making new highs.   Don’t bank on any long-term trends staying in place.  

Until next month, this is Van Tharp.

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 condition.

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 2012, and many more to come in 2013. 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 www.vantharp.com. His newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.


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Trading Tip

July 2013 SQN® Report

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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 SQN 100 score uses the daily percent change for a 100-day period. Typically, an SQN score over 1.45 is strongly bullish and a score below -0.7 is very weak. We use the following color codes to help communicate the strengths and weaknesses 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

Just looking at the first part of the report will tell you the whole story this month.   Practically the only place that looks positive right now is the US where all of the market segments are light green. 

Meanwhile, most of the world looks pretty pathetic.  Europe is neutral at best with most areas being yellow though the Netherlands is light green and Emerging Europe is red.   Africa, Russia and Austria are brown.

In Asia, China is quite strong with an SQN score of over 2.   Japan is light green and everything else is fairly week.  Thailand and Australia are both red.

Even in the Americas, everything besides the US is weak.   Brazil, Chile, and Latin America are all red, while Canada and Mexico are brown.

When you look at individual US sectors, however, you find some real strength.  Pharmaceuticals, Aerospace and Defense, Biotech and Genome and Food and Beverage all have SQN scores above 2.0 for the last 100 days.   Insurance, Media and Regional Banks are all dark green.   Biotech, consumer staples, financial, industrial, semiconductor, technology, broker dealers, gaming, telecom and the Dow transports are all light green. 

On the negative side, metals and mining and are red.  The volatility ETF is also red which means low volatility in the markets (which is good for the bulls) and not much inflation.

Currencies are all particularly weak with only the Chinese Yuan being light green.  The US Dollar went from light green to brown.   Three currencies are down a great deal — the Aussie dollar, the Brazilian Real and the Indian Rupee.  I actually didn’t get slammed with currency costs on my recent trip to India.   Of course, we paid our fees in US Dollars. 

chart1

(to see a larger version of this chart, click here)

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

Debt, Commodities, Real Estate, Top and Bottom Lists

chart2

Bonds are all weak, suggesting that the market is expecting higher interest rates, except for 1-3 year bonds (which are yellow).   Long-term bonds and inflation protected bonds are all red.

Commodities are also generally weak with only oil being light green.   Gold, silver, base metals, coal, agriculture and global agribusiness are all red.   Commodities are brown as are steel and natural gas.

All of the real estate sectors are brown without exception.

There are eight ETFs with an SQN score above 2.0, most of which I’ve already mentioned, however, there are also five areas in which the SQN 100 is -1.75 or worse.   The weakest ETFs cover the Aussie dollar, coal, the Brazilian Real, the Brazilian market and Chile.

What's Going On?

Overall, if you are fully invested in US equities markets, you could have made some gains that equate to good yearly returns.   Those who continue to buy and hold might find their returns lower or even negative by the end of the year.  But who knows?  Perhaps the Fed will continue to buy $85 billion worth of bonds monthly throughout the rest of the year. 

Remember that pension money has now stopped flowing into the market by this time of the year.   So overall, except for the Fed providing its inflows, there should be a net outflow because of the number of retirees who now need to live on their investments.

Until next month’s SQN report, this is Van Tharp.

The markets 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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August 07, 2013 #641

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