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RJ HixsonMarket Update for the Period Ending November 1, 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

The country survived a two-week federal government shutdown in the first half of October.  At the last minute, everyone agreed to suspend the debt limit until February 7, 2014 and restore funding to the sequestered budget levels through January 15.  So, come January/ February timeframe early next year, these same issues will come up again.  No political drama through the holidays?  What will we do?

The Peak workshops last month fell right in the middle of the government shutdown so the topic came up on occasion.  I found interesting a comment from someone who had lived a long life in many parts of the world.  He said something to the effect of Americans would do better to study the history of the Roman Empire rather than their own to get a better context for what is happening in Washington right now. 

What effects did the markets show for the “calamity” in DC?  Long-term treasuries were slightly lower at the end of the shutdown than they were at the beginning, but the market and the dollar were higher.  Actually, the S&P and the Dow Industrials indexes were in record high territory at the end of the month.  That picture might have been different had the issues not been resolved prior to a potential technical default but that was averted. 

Part of the shutdown was purportedly to help provide some focus of the size of the US debt.  Today, our official government debt is now over $17 trillion and is going up at a current rate of about a trillion dollars every year.   It’s not the Boomers who are on the hook for this growing debt— it’s the younger generations who will have to pay it off.  Stan Druckenmiller has been speaking at colleges recently explaining this point and he believes his young audiences are starting to get it.  The same former hedge fund manager also said that the Fed tapering will have a big effect on the markets when it happens.  He also went on to say and that the next Fed chairman (or chairwoman) will have a major impact on the QE policy.  Yellen is Bernanke’s heir apparent and has a reputation as an extreme dove, so we may not see tapering happening anytime soon.  Exchange rates and/or interest rates may force the issue at some point but... how about if we just deal with that later in keeping the spirit with Washington regarding the deficit and debt? (That’s a touch of sarcasm.  Have you considered your action plans should the dollar collapse or interest rates start to climb? Think through some scenarios and make plans now.)     

Here’s the update for some figures from the debt clock website so you can watch the changes in debt 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. 

Our national debt stands at $17.13 trillion.  That’s up from last month but you were probably expecting that.  The website puts the US population now at 317 million within which 144 million are employed and of those, 114.6 million pay income tax.   Those 114 million taxpayers help support the group of 109 million that includes retirees, the disabled, and those receiving food stamps.

chart3

Part II: The Current Stock Market Type Is Bull Quiet

Each month, Van looks at the market SQN® score for the daily percent changes in the S&P 500 Index over 200, 100, 50 and 25 day periods. For our purposes, the S&P 500 Index defines the market.    The Market SQN for 200 days is strong bull while the 100, 50, and 25 day scores fall in the bull range.  Van uses the 100 day period to define the market type and 100 trading days back puts the start of that period in early June. 

In this first chart, you can see weekly bars for the S&P 500 and how the market continued its long-term uptrend in October.  It was hitting new all-time highs in the latter part of the month.

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

chart4

The next graph shows the Market SQN score for a 100-day period which has been climbing since early October and is now solidly in the bull range. 

chart5

Lastly, let’s look at the market volatility.   Market volatility touched the normal range in early October but then went back to quiet mode as the month moved on.  

chart6

(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 for the last month.

chart7

In October, all three indices showed very strong gains for the year ranging from 20% to nearly 30%.     

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.  

Because the CRB:CCI index was discontinued on April 17th, Van switched his commodities measuring tool to the ETF called DBC.  He has kept the prior years’ CCI data (from 2005 to 2012) as a reference since the DBC data does not go back that far.

chart8

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

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

 

Lower

Lower

Higher

Higher

Lower

Lower

Higher

Higher

Oct-13

-1 

+1 

-1

+1

0

Commodities and gold were lower in both time periods while basic materials companies and financial companies were higher.  This data suggest that the deflationary pressures we have seen for much of this year have eased up and are balanced with inflationary pressures at the moment.  Every month this year has had either a deflationary or neutral score with the exception of January. This is in spite of nearly $1T of money creation by the Fed.  What do you make of that? 

Part IV: Tracking the Dollar

The US dollar has been in a downtrend since July.  In October, it may have found a bottom at previous swing lows in December, 2012 and February, 2013. 

There have been a spate of media articles very recently about traders positioning themselves for the approaching Fed tapering and adjusting their dollar holdings accordingly.  Maybe that’s the case for the large masses of uninformed traders which has caused the dollars very recent resurgence off of its lows. More likely, however, it’s the Tharp Effect in action. Van returns to the country within a week so a new strengthening phase may run for a few months - until he leaves the northern hemisphere’s winter for the Australian summer in February. 

chart9

General Comments

Bull Quiet conditions make it appear everything is OK at the moment.  Janet Yellen will be taking over the helm of the Fed soon and maybe it’s steady as she goes with the QE.  Do these points make you feel comfortable investing in long-term positions?  Anyone who understands the underlying fundamental conditions probably does not gain much comfort in the current market type, though you may take advantage of them while they last.  You are best advised to keep tabs on the big picture and understand how market types develop.  Before we see bear market conditions, generally we would see an increase in volatility first. 

Van will be back to writing the update in December. 

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: R.J. Hixson is a devoted husband and active father. At the Van Tharp Institute, he researches and develops new products and services that help traders trade better. He’s looking forward to joining Van in Sydney and hopes to take in an Sydney Opera House production and hop up to Manly Beach for a quick swim in the surf.  He can be contacted at “rj” at “vantharp.com”.

 

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Trading Tip

October 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 apply a version of my System Quality Number® (SQN®) score to measure the relative performance of numerous markets in a world model. 

The Market SQN score uses the daily percent change for input over a 100-day period. Typically, a Market SQN score over 1.45 is strongly bullish and a score below -0.7 is very weak. The following color codes help communicate the strengths and weaknesses of the ETFs in this report:

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

World Market Summary

Each month, we look at basically all the markets in the world by asset class, segment, region, and sector. This month, we see mostly green in the summary below with some yellow as the secondary color.  In the US, the only segment not green is DIA, the Dow Jones Industrials ETF.  Europe and Africa are all green with the lone yellow exception in Sweden.  Asia has a mix of both good and mild strength with China showing exceptional strength for the last 100 days.  In the Americas, Latin and South America show only mild strength with Chile presenting the only negative country score in the entire model.

chart2

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

From a sector standpoint, we see again mostly green and some yellow.  Aerospace & Defense has the strongest score not only for the sectors but also for the entire database this month.  Other very strong sectors include media, gaming, biotech and consumer discretionary.  With the quiet market volatility recently, VXX, a volatility ETF, is quite weak and is the only red instrument in this section. 

Currencies, on the other hand, show much less strength than equities.  Here, there’s a fairly even split between brown and yellow with the Chinese Yuan being the only sign of good strength.  The Canadian Dollar and the Japanese Yen are the two weakest currencies. 

Commodities, Real Estate, Debt, Top and Bottom Lists

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

chart1

Commodities are now showing a broader mix of performance as opposed to the last few months when much of the category was completely brown and red.  Energy and metals related ETFs are generally bearish or neutral with natural gas continuing to be the weakest.  Steel shows the most strength, followed by timber and water.  

Real estate went from all brown and red last month to all being neutral to bullish in October. 

As for bonds, it seems like the longer the duration, the weaker the Market SQN score.  Across the board, however, the bonds category’s Market SQN scores have come up — they all had very bearish or bearish scores for the last few months.  Short term bonds and T-Bills are actually positive this month. 

In the top market SQN scoring ETFs, no one group dominates the list.  Aerospace, China, industrials, tech, and media make up the top 5.  For the weakest scoring ETFs, we mainly see inverse or short funds on the list — which is no surprise given equities performance over the last 100 days.  You can see several China-related issues, pharmaceuticals, aerospace, and biotech.  The weakest list includes a large number of debt issues. 

Summary

Van’s newest table measures the percentage of ETFs in each of the strength categories.  Nearly half of the ETFs are in the bullish range.  The very bullish percentage is the highest it has been in four months, while the very bearish percentage is at the lowest level it has been at since Van started tracking these figures at the beginning of the year. 

Date

Very Bullish

Bullish

Neutral

Bearish

Very Bearish

 

> 1.5

0.75 - 1.5

0 - 0.75

0 - -0.7

< - 0.7

January 31st

27.1%

39.6%

20.7%

6.4%

4.7%

February 28th

10.3%

45.2%

24.4%

11.9%

7.5%

March 31st

39.2%

25.5%

19.1%

9.0%

6.4%

April 30th

49.1%

21.1%

14.8%

8.0%

6.2%

May 31st

29,2%

23.6%

19.9%

12.3%

14.2%

June 30th

2.1%

31.0%

23.2%

22.0%

20.9%

July 31st

8.2%

33.5%

29.0%

13.3%

15.2%

August 30th

1%

15%

46.4%

19.3%

17.5%

Sept.  30th

1%

13.8%

42.3%

23.0%

19.1%

Nov. 1

13.3%

48.3%

21.8%

12.5%

3.3%

What's Going On?

You can see that October brought green scores to the majority of ETFs in the world market model at the beginning of this article.  The numbers in the summary table just above reveal a similar situation for the whole database. 

As we look back a few months in the summary table just above, you can see a strong performance on a 100-day basis from the overall database coming out of last winter and through the spring.  Then, the average Market SQN score for the database shifted to neutral over the summer and the distribution expanded more evenly across the ranges.  In August and September, nearly half of the database consolidated in the neutral Market SQN zone.  In October, there was a noticeable shift — about 60% of the ETF database now scores in the bullish and very bullish ranges.   

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 because trying to navigate the 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 own beliefs about the markets.


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November 6, 2013 #654

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