Tharp's Thoughts Weekly Newsletter (View On-Line)
Market Type Update by Van K. Tharp, Ph.D.
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Mid-Month Market Type Update
In our bear market workshop, we talk about three phases of bear markets and how the first phase can be one of the most profitable. In an early bear market, volatility has not gotten insane yet and there are many good shorting opportunities; plus you can simply go long volatility. The current market may be an example of an early bear phase or it may be a sideways market that is getting more volatile. Let’s look at some data.
The table below shows market type data for October through Friday, the 10th. Notice that the market is Neutral Normal and the range change % over the last 100 days is only up 1.78%. We’re down 5.23% from the last high close and up 1.78% from the lowest low — which was exactly 100 days ago. That means the range change % of the market over the last 100 days is only 6.91% — a very small range.
Now let’s look at the first four days of the 100-day period ending on Friday.
You’ll notice that only the first three days of the last 100-day period were below the close on Friday. This means that if the market 1) goes down, 2) does nothing, or 3) goes up less than 1.47% between October 13 and October 15, we’ll get a bear signal. Now, that won’t mean we will be in a bear market — just that we’ll be right on the edge.
How do you make money in the market? It’s not by predicting. Instead, it’s by watching what the market is doing and then going with the flow. Right now, we have all of the following:
1) The dollar is a fiat currency and as a country, the US is bankrupt. The Federal Reserve actually said we were bankrupt in a published study that we have quoted many times in this newsletter.
2) Our current official national debt is over $17.7 trillion and our unfunded debt is over $100 trillion. We are the largest debtor nation in recorded history.
3) For every person who actually pays taxes right now there is at least one person being supported by those taxes.
4) Politicians will do nothing to correct this, and we are still spending crazy amounts of money to “defend” ourselves from terrorism.
And on the positive side:
5) Many newsletter writers are very bearish and calling for disaster scenarios, which is often a positive sign for the market.
6) The Federal Reserve (which is also nearly bankrupt) has been printing money like crazy which goes straight to the major banks and into the stock market. That’s what has pumped up the stock market since 2009.
7) Interest rates have not yet gone up and the Fed is still buying our debt and pumping money into the system. This could continue and support the dollar. Steve Sjuggerud, a newsletter writer who has one of the best track records in the industry, thinks the market will continue to go up at least until the spring for these specific reasons.
8) Even with the fundamentals as they are, the US is much stronger than many other countries at this juncture and there is a flight into the US dollar.
On top of all that, what’s the market doing? It’s basically flat and fairly quiet over the last 100 days which makes it a very difficult market type in which to make money. Plus there are many, many stocks in very strong downtrends with negative SQNs. In our world market model with 509 ETFs, 59.9% are bearish, 32.2% are neutral, and only 12.4% are bullish. That says — just by watching what the market is doing, not by predicting — that there are many more shorting opportunities right now than there are long opportunities.
You could make a case for a bear market being right around the corner. Why?
- Europe is a disaster right now.
- The world is in a deflationary scenario while volatility is going up.
- Conditions like this existed in both 2000 and 2007 right before very strong bear markets developed.
The fact is, however, that we are still in a flat, sideways market. As I outlined above, we could hit a bear normal market type as soon as this week. But that would not be a Bear Volatile market type, just Bear Normal — which might be only a slight detour before it moves back to sideways. In this narrow range market, sideways could suddenly have a bullish bias. A number of scenarios are possible.
As I have said, money is made by going with the flow of what the market is doing right now and I’ve outlined that scenario very clearly. So be careful with your trading and be AWARE.
On Monday October 13th at the close, our market type changed to Bear Normal. The 20 day ATR% for over 15,000 days is 1.29 and the market just moved above that so it could become Bear Volatile within a week or so if we were to see strong down volatile movement. At the moment, however, the 100-day range change percent is -0.7% and the difference between the high and low of the last 100 days is only 6.79%.
Again, this is not a prediction but a description of what the market is doing.
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How Low Can We Go?
A Brief History of Market Pullbacks
During a market pullback like the one we’re experiencing in the U.S., the big question on everyone’s mind is, “How low can it go?”
During the up phase of a bull market, it’s easy to say that pullbacks are normal and expected. But when we’re actually knee-deep in the midst of said pullback, rational thought tends to get tossed out the window. At times like this, investors (and yes, traders) start to make decisions based on how they feel when they look at the market and what it has done to their portfolio.
To give us some data to digest, let’s look at a history of market pullbacks and see if we can draw any rational conclusions about how far our current pullback could travel and draw a couple of useful “lines in the sand” that could act as action points.
Pullbacks, by the Numbers
Based on the low that the S&P 500 made on Tuesday October 14th, the index had posted a 6.4% pullback on a closing basis, the largest in 23 months. (The peak-to-trough number — highest intraday point to the lowest intraday point — was 7.3%). Michael Batnick, Director of Research at Ritholtz Wealth Management lists the pullbacks that have occurred since this bull market started:
For the record, Mr. Batnick missed the 9.84% drop that ended on 11/25/11, but his data looks good otherwise!
We can make some useful observations from this small data set that relate to our current drop. First, we can rest a little bit easy. The market is going to breath — or have pullbacks — even in the strongest bull markets. And this one is not out of the ordinary. In fact, until it drops significantly more (as we’ll see in our sign post chart below) it is, so far, quite ordinary.
Now let’s look at some more broad-ranging historical data. LPL Financial Research just published this table showing the number of pullbacks (drawdowns of >5% but <10%) and corrections (drawdowns >10%):
Note that this chart gives intraday high to intraday low data and thus shows more pullbacks during our current 5½ year old bull run. The same research piece shows that we have, on average, about three 5% pullbacks per year. So the fact that we’re in the middle of just our second one this year means that we’ve had a more bullish run than usual. Again, certainly no cause for alarm.
Where Could This Go?
Let’s take a look at two key sign posts to watch as this drawdown plays out:
The first key area will be the closing price from 2013 which was 1848.36. A close below this level would mean that we’ve given up all our gains from the year. The second level to watch is the distance of a 10% correction. For intraday levels, this would mean a drop to 1817.33. On a closing basis, we would need a close below 1810.22.
Until these levels have been breached, this is all just normal market activity. Keep your stops in place and stick to your plan!
God bless you,
Each time I read a book written by Dr. Van Tharp, I have learned to see trading in a very different way than I was seeing before, and a way that makes improving performance in trading and/or in investing. I had read other books written by Dr. Van Tharp, for example, Trade Your Way... was the first book I read from Van Tharp. I always see how Tharp's books are different from other trading books, and Trading Beyond The Matrix is the book that surprised me most.
I heard about this book (Trading Beyond The Matrix) because I subscribed to the Van Tharp Institute's newsletter, where they said the book would be published on a specific month. I was waiting the publication of the book, to see what will be the new information about trading. After it came out and I read it, I was very surprised because although all the books I've read from Van Tharp always have made me see things in a new way, Trading Beyond The Matrix has a special advantage: teaches what is really important for trading in a very clear way. Because of that, I think this is the best written book about trading, and am thanks to reading it, I have experienced the most profound transformations, and here I tell the story of the greatest of them.
Thanks to Trading Beyond The Matrix, I experienced a state of oneness or I became one with the market. This is something I did not even know was possible, and I do not think other trading books would help me to know that state. I have not read another book to teach this topic as this book does.
Experiencing this state of oneness was incredible for me. I was full of satisfaction and full of happiness. It was as if all my life was now full, and nothing was missing. All my life was full, not full of things, but full of satisfaction and happiness. I experienced the complete happiness. It is the greatest state that I have met in my life, and now I just want to be and operate in this state.
Here is how this happened to me:
I'm Catholic, and I had just finished doing a course about prayer. On that day, I was praying the psalms before I started my trading. At that time, I also had just read about what Dr. Van Tharp says about oneness. At that time, I was feeling very calm and that everything was just fine. I was very calm and I was feeling I can trust in God, and that I could leave my reasoning and my thoughts, and trust in God for whatever is going to happen, as Tharp taught about trust in our inner guidance. In my case, I am Catholic, and my inner guidance is Jesus Christ. At that time I had just finished my prayer, and I felt very calm, I sat at the computer and began to see the charts. It was all very calm and serene. Nothing mattered and all was very quiet. I was watching the graphics quietly when suddenly, I began to feel a peace, which was transformed into a deep peace, and peace was growing, and then I became one with the market. There was no space between the market and I, and all (the market and I) was one. It was as if many beliefs that I had before about what is reality and how things work, simply disappeared, and the barriers disappeared, and what I believed before about the reality. But I was aware of me, because I could act in full knowledge of what I was doing, but at the same time, together with the market as one. It is very difficult for me to describe and explain this experience. I think that to know how this state is, it must be experienced.
Thanks to that experience and other things I've learned from "Trading Beyond The Matrix", I changed my way of seeing and acting in trading (and in other aspects of my life too). It has changed my way of seeing life and my perception of it, and It has changed my way of seeing who I am because now, I ask myself (or to inside of me): "And then, who am I?" ... But now I believe that only God is.
Thanks to "Trading Beyond The Matrix" I learned about the great importance of psychology for trading, and how everything is related to psychology. Of course I learned that from other books and articles by Dr. Van Tharp where he says that, but "Trading Beyond The Matrix" has clarified much for me, in a very strong and clear way, not only with theories but with practical exercises. As Dr. Tharp says, I think the whole life is related to psychology, because we are humans and we use psychology for everything we do. Our psychology is with us any place we go, and in anything we do too, of course. So I think what Dr. Tharp says about trading being 100% psychology, is applicable to all of life too.
Before I knew about "Trading Beyond The Matrix", I learned about and practiced for many years many psychology techniques. Some of them were a lot of work, and sometimes they did not work (at least not for me). But after reading "Trading Beyond The Matrix", I could even overcome a block state in which I was blocked for years, and quickly! By using these methods that are in "Trading Beyond The Matrix" I could simply dissolve it, and I could dissolve others states I wanted to overcome, even in less than 1 minute! (this is something I had not done in months and I started to practice in the other areas and roles of my life). For example, there was a time I identified a negative association about God and trading, and sometimes I felt uncomfortable with the idea of trading. But then, I learned how it was just a belief. Just that. And I can always change any belief I want, and when I see things in a different way, there is no conflict between God and trading. And all this for the price of a book.
Years ago, when I first became interested in trading, I purchased an expensive course, and it was just about a system, and that did not help me a lot. They did not teach even 10% of what this book teaches. I followed in my research when I met Van Tharp's books. I found it amazing how one book of Van exceeded the content of all the courses I have reviewed and all other books about trading. For me, "Trading Beyond The Matrix", is the most revealing trading book.
I am grateful to Dr. Van Tharp for the books he has written and all the work he has done for others. I think "Trading Beyond The Matrix" has the privilege of teaching the most important thing about trading, and in a different and more clear way than any other Trading book. Dr. Tharp: I think the work of teaching, as you do in this book, is a responsibility that you have taken with commitment. And you have taken the opportunity to do it, and give to others, like me, the opportunity to learn from a real mentor through this book in a great way. If it were not for his books, we would not have the opportunity to develop and grow as real traders.
Thank you very much for writing "Trading Beyond the matrix", and thank you for all the work you and your all your team do for teaching others to progress in trading, as the courses, the newsletter and books you have written.
Thank you very much,
J. Ernesto D. M.
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