Tharp's Thoughts Weekly Newsletter
: April 2016 Market Update:
Sideways (Bear?) Quiet Market Type by Van K. Tharp, Ph.D.
: $700 Early Enrollment Discounts Expire Next Week on May Workshops
: April 2016 System Quality Number® or
The SQN® Report by Van K. Tharp, Ph.D.
Adaptive Swing Trading Systems:
Advanced Trading Workshop
July 15-17, 2016
In this new three-day workshop, Dr. Ken Long will present his most recent trading innovations — a series of advanced, adaptive swing systems.
Regression Lines – An Adaptive Framework
For years, Ken has been looking at regression lines to help him understand the broader trends in the market. Recently, he started applying linear regression methods to individual indexes and to individual stock prices to see what he could find. Ken is constantly finding what works and then extending it. He knew that a regression line gave the best linear description of a data set using its slope, and its R2 figure provided very helpful information. Don't worry if you don’t understand these terms or basic statistics—just know that regression lines can be very useful when applied in an appropriate trading system. In simpler language—they work!
As have most traders, Ken has heard plenty about moving averages crossover based systems over the years. The idea has plenty of merit for finding shorter term opportunities within longer term trends. That is, when there are trends. A major problem for moving average crossover systems lies in the flat periods. Traders can get “chopped up” when the price moves up and down causing the averages to cross and then cross back again. Ken wondered if regression lines would work better. They did – but not good enough to have a great trading system yet.
After more thinking, a good amount of research, and testing various strategies, Ken found two additional inputs that added a lot of confidence for his entry and exit signals. Ken first paper traded the concept for a while and then started a prototype trading test with small positions of real money and intraday holding periods. As he traded and evolved the concepts, they gained more clarity and evolved into a framework for a kind of trading with several possible entries and several possible exits. Today, he trades several variations of regression line crossovers (RLCO) on an intraday basis with a “production level” position sizing strategy. Recently, however, Ken started using daily price bars and found much success modifying the strategies for swing trading.
Click here to learn Top Benefits of the Regression Line Framework
April 2016 Market Update:
Sideways (Bear?) Quiet Market Type
by Van K. Tharp, Ph.D.
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I always say that people do not trade the markets; they trade their beliefs about the markets. In that same way, 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 your beliefs are not similar to mine, however, then this information may not be useful to you. Thus, if you are inclined to go through 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. Simply know that I admit that these are my beliefs and that your beliefs might be different.
These monthly updates are in the first issue of Tharp's Thoughts each month which allows us to get the closing data from the previous month. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp's Thoughts), 2) the debt statistics for the US, 3) the five-week status on each of the major US stock market indices, 4) our four star inflation-deflation model, and 5) tracking the US dollar. I also write a report on the strongest and weakest areas of the overall market as a separate SQN™ Report. Significant market charges may mean the SQN Report comes out more than once a month.
Part I: The Big Picture
So what are the markets telling us now?
Over the last 100 days, the S&P 500 is down 0.07%. From April 8th through April 28th the market type was sideways, however, it turned bear on the last day of the month. In addition, the US Dollar has been in a huge downturn for the last four months which actually makes the market look better than it is because everything is going up relative to the US Dollar. So that’s not good news. If most of your assets are in US Dollars, then you probably lost money last week unless you did really well in the market or in other investments.
This is the summary chart I produce every month with the most important figures from the US Debt Clock website.
You can see all of the figures that they track at usdebtclock.org. They say that in late April 2016, our official debt has gone over the $19 trillion mark and now we are at $19.26 trillion.
Incidentally, the website says there are 119.6 million taxpayers. It also says there are 161.6 million people receiving government support, however, I’m not sure how they determine that as some of the sections there are certainly duplicated. As a result, I add together US Retirees (49.6 million) food stamp recipients (44.4 million) and disabled people drawing social security (10.8 million). I don’t think there is any overlap here. Those groups total 104.8 million and that’s why I say that they constitute a group that’s 87.6% of the number of taxpayers. I could also include all government employees (23.8 million) as among those supported by taxpayers - but they do pay taxes. Remember about 10% of the taxpayers (11.9 million) pay most of the tax revenue.
Part II: The Current Stock Market Type Is Sideways/Bear Quiet
My market type classification is not predictive but descriptive — rather than telling us what’s going to happen, it simply tells us what’s going on now. It’s like looking at a trend. You can say, well, right now it’s going down, however, that doesn’t mean that in a few days the direction might change. Right now, the market is in a Sideways/Bear Quiet market type. What type will it be in a month? We’ll know in a month.
The graphs below include a chart of weekly bars for the S&P 500 over the last year, the Market SQN® score for 100 days, and the ATR percent volatility.
The directional chart below shows that the market has been in bear territory for most of the last six months even though it has never really declined by a serious amount. In fact, the price chart actually formed a V shape but last week’s red price bar looks quite ominous. Anyway, I’d expect the market to stay in limbo for some time but remember this sideways/bear market is in equities. In gold, we have a strong bull market while in the US Dollar, we have a strong bear market.
The next chart shows market volatility moving down for most of April and finishing just within the quiet range. Historically, the bear quiet market type is very rare and the market will probably either improve or volatility will increase a lot.
Below is a chart of the recent weekly changes in the three major US Indices. We now have two of our three major indices for the US up slightly for the year. The DOW is up 2.0%, the S&P 500 is up 1.05 (it’s just down slightly over the last 100 days) and NASDAQ 100 is down -5.49% for the new year.
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 understanding inflation and deflation can help traders understand some important big-picture processes.
See the tracking table below.
Here are the model components and how the prices looked at the end of February compared with two months back and six months back.
So with April at +2.0 we have a streak of two positive months in a row after two neutral months and our first sign of inflation in some time. Even though the Federal Reserve started to raise interest rates in December, what they’ve done so far has had little impact on the economy and they remain very cautious.
Part IV: Tracking the Dollar
The US Dollar Index was falling throughout most of March and April. It is now around 93. This is a huge down move and the USD bullish ETF symbol UUP is the weakest ETF among the 500+ ETFs we track. The falling dollar makes everything else look good, however, that’s bad news for you. That means your net worth (if based in dollars) fell about 2.5% last month. I’m going to India in June, so you might want to invest in the Rupee now. (That’s a joke, of course — not advice! I joke that there is a "Tharp Effect" when I travel internationally which makes the dollar go down in value.)
The market spent almost all of 2015 in a neutral to down direction — that is — the market type was mostly sideways and quiet (volatility). So far, those conditions have pretty much continued in 2016. These market types are about the hardest kinds in which to make money.
The Fed promised to raise interest rates, but hasn't, so the US Dollar has become very weak. But while the dollar is weak and the stock market is not that interesting, gold has suddenly started to look very good. Right now it’s the place to be.
While we do not use market type to predict, just to tell us what is happening right now, the fundamentals would suggest that we are due for a significant bear market in 2016. Watch volatility. If it starts to climb, the bear market will resume. If volatility continues to be quiet, then I’d expect either we continue in a sideways market or the market starts a slow climb to new highs.
My conclusion ... the market type right now is bear quiet. This is a very rare market type — so it will likely not last very long. Right now we are in a short-term rally. Who knows what it will be at the end of next month.
Can you make money in this climate? If yes, then continue to do what you do.
Until next month’s update, this is Van Tharp.
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 new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.
Here's Just A Bit About Each New Workshops Coming In July
INFINITE WEALTH — July 8-10
The key to being infinitely rich— not having to work ever again— is to have assets and passive income (income you get without working) that are equal to or greater than your expenses. In the example given above, if you had assets that gave you $3,000 per month in passive income, you could last forever. You would, therefore, be infinitely rich. For example, if you had $300,000 and you got a 1% return on your money each month from say dividends, then you’d be infinitely wealthy.
There are four basic ways to achieve infinite wealth by this definition:
• First, reduce your expenses. And even if you are poor, taxes are probably your biggest expense, so you must reduce your taxes. Most traders don't know how to deduct all of their expenses, yet you can. And we’ll show you how in this course.
• Second, increase your assets. This means pay yourself first. Allow your assets to grow so that your money is working for you instead of you working for money.
• Third, increase the passive income you receive from your assets. The last concept is so simple and so few people think about it. Yet it is incredibly powerful. By the way, I don’t define passive income the way most people do because all passive income requires some work to protect yourself and make sure your income is safe. As a result, I define passive income as any income you can make by working 2 hours or less each day. So, if you could get up and make 2R each day as a day trader by trading for the first 90 minutes of that day, that would qualify and you can learn about how that's done in our technical workshops.
• Fourth, once you’ve achieved infinite wealth, it is then very easy to raise your lifestyle and bring luxury into your life. Why? Because, you are now on the fast track instead of being in the middle of the rat race.
Systems Thinking: How to Use Systems Thinking to Improve Your Trade Craft — July 12-14
Most traders think tactically – chart patterns, orders, right now or today. Systems thinking typically doesn’t enter their world.
Actually, that’s quite normal – and not just for traders. Very few people even know what the term “systems thinking” means and fewer still can actually think systematically. In fact, research in the area has shown that less than 10% of the population is able to think systematically.
Being able to think systematically, however, is a great edge for traders. Why? Capital markets are complex, dynamic, and adaptive systems. Individual traders are also complex, dynamic and adaptive systems themselves. Do you think systematically about those? If not, the markets are quite efficient at draining the accounts of unprepared participants.
There’s good news, though — you can learn how to start thinking systematically and you can develop your systems thinking mindset to gain an important edge in the markets.
ADVANCED ADAPTIVE SWING TRADING — July 15-17
In this new three-day workshop, Dr. Ken Long will present a series of advanced, adaptive trading systems that work well in the swing period holding time-frame – from two days to two weeks.
Adaptive trading systems have rules and rule parameters that adjust to market conditions and price conditions rather than remaining constant.
Click Here To Learn More
Combo Discounts available for all back-to-back workshops!
See our workshop page for details.
April 2016 System Quality Number® Report
The SQN® Report
by Van K. Tharp, Ph.D.
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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 1.47 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:
- Dark Green: ETFs with very strong SQN® 100 scores > 1.47.
- Light Green: ETFs with strong SQN 100 scores (0.70 to 1.47).
- Yellow: ETFs with slightly positive Market SQN scores (0 to 0.70). These are Neutral/Sideways.
- Brown: ETFs with slightly negative Market SQN scores (0 to -0.7).
- Red: Very weak ETFs that earn negative Market SQN scores (< -0.7).
This is basically the same rating scale that we use for the Market SQN® Score in the Market Update. The world market model spreadsheet report below contains most currently available ETFs; excluding inverse funds and leveraged funds. In short, it covers equity markets around the globe, major asset classes, equity market segments, industrial sectors, and major currencies.
World Market Summary — Equities & Currencies
Each month, we look at the equity markets across the globe by segment, region, and sector. April looks much better than many previous months but that’s partially because everything in our tables including the S&P 500 is based upon the US dollar. Thus when the dollar goes down, the market looks stronger.
Half of the US major market segments are yellow this month and the other half are brown (slightly negative), so money is starting to move into strong, stable companies and away from the small caps and growth segments. Except for Mexico, all of the other American continent countries are green. But again, this is partially an effect of the declining US Dollar.
In our far left Asia region section of the model, Australia, India, Malaysia, Singapore, South Korea, Taiwan, and Thailand are all yellow. In contrast, China, Hong Kong, Taiwan, and Japan are brown.
Europe is basically half yellow, half brown. The brown (bearish) countries are France, Germany, Spain, Switzerland, and the UK. Emerging Europe, however, is now light green. This is an improvement over last month, but some of it is an anomaly because of the fall in the US Dollar.
The US sector view is quite mixed. There are two dark green sectors – Metals & Mining and Utilities. In contrast, there are three red sectors, Biotech, Genome, and Broker Dealers. I think the Broker Dealers being red shows the impact of the bear market. Be sure to watch the price chart of the company you trade through to make sure that they remain solid and are not about to go under. All remaining sectors are either yellow or brown.
The Japanese Yen is the strongest currency despite the Bank of Japan’s negative interest rates. It fact, the yen is super strong with a Market SQN score of 2.00. The Canadian Dollar, the Brazilian Real, the Euro, the Indian Rupee, and the Swedish Krona are all relatively strong. The US Dollar, however, as we’ve been saying is now the weakest currency on the chart. I’m going to India in June so this might be a good time to go long the Rupee (remember the Tharp Effect, lol).
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.
Again, my comments about this section must be viewed within the context of a falling dollar. Commodities, as a whole, have moved to yellow. Gold is now dark green (strong bull), while Silver, Base Metals, Coal, and Steel are now bullish and light green. Oil, Natural Gas, and Timber are brown but they have gotten stronger.
The top ranking ETFs in the database are now all dark green, with municipal bonds leading the pack. Eight of the ETFs are now over +2.0 compared with just six last month. Gold and Junior Gold miners have moved into the top as has the Japanese Yen.
The bottom ranking ETFs were all red last month, but this month only 13 of them are red. And only three of those are worse than -1.0. These include: the US Dollar (as the worst performing ETF which we’ve been talking about), Japanese stocks (because the Yen is so strong perhaps?), and Healthcare.
Now let’s look at the summary table which measures the percentage of ETFs in each of the strength categories.
Six months ago 92% of the ETFs we track were either in bear territory or strong bear territory. That number was 78.3% four months ago, 74.3% last month, and in April, ETFs in these two categories moved down to 40.1%. We are in a mild bear market, but it looks much stronger because of what might be called a crash in the US Dollar. Volatility is still quiet, so this is not that dangerous - yet. And if you were in Gold or precious metals last month you made a lot of money.
Be careful to base your actions upon what is happening, not what you think might happen.
Until next month, 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 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.
TRADING BEYOND THE MATRIX
The Red Pill for Traders and Investors
We pay for the book, you pay for shipping.
ALL YOU HAVE TO DO IS CLICK HERE!
Eleven traders tell their stories about transforming their trading results and lives, in this 400 plus page book.
Below is a brief video on how powerful this book is to traders.
Swing Trading Systems E-Learning Course
Ken Long's systematic approach to swing trading with 5 distinct trading systems. This course has over 10 hours of instruction with significant follow-along documents included for students to download.
Review the videos as many times, and as often as you like, for one full year. Plus, you receive a bonus workshop at no extra charge—Dr. Van Tharp's Tharp Think Essentials!
If you are interested in both this video home study program (featuring mechanical, rule-based systems) and our new Advanced Adaptive Swing workshop (adaptive trading systems have rules and rule parameters that adjust to market conditions and price conditions rather than remaining constant) you benefit by buying both at the same time.
When you register for the workshop you can get a 22% discount on this home study.
The home study is not required to attend the workshop, however, an understanding of the systems in the the video home study may help a less experienced trader better understand the more advanced trading style which will be presented in the workshop. The systems, however, are totally different and the Advanced Adaptive Systems Workshop does not build upon the systems in the home study.
You can complete this course at your own pace, from the comfort of your own home or office, and access the materials as many times as you wish during your 1-year subscription period.
Take a look at this video from Ken to learn more about this course.
We have extensive information about the Swing Trading System e-learning course, including how to purchase...click the link below!
Learn More About The Swing E-Learning Course...
Enter the Matrix Contest
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