Tharp's Thoughts Weekly Newsletter

• Article: May 2016 Market Update: Sideways Normal Market Type, by Van K. Tharp, Ph.D.
• Workshops: SALE on Ken Long's Workshops This July!
• Tip: May 2016 System Quality Number^® Report, by Van K. Tharp, Ph.D.
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Feature Article

May 2016 Market Update:
Sideways Normal Market Type

by Van K. Tharp, Ph.D.

Click here to resolve formatting problems

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?

The Market SQN score for the last 100 days is showing a sideways direction. In fact, all four measured periods show that the market has sideways Market SQN scores. On a percentage basis over the same measured time periods, the market is either slightly up or sideways. Over the last 200 days the S&P 500 is up 0.65%; over the last 100 days, it’s up 5.36%, over the last 50 days, it’s up 2.31%; and over the last 25 days it’s up 0.44%.

U.S. Debt Clock

An image from the US Debt Clock website is shown below where you can see all of the figures that they track. They’ve changed their statistics somewhat. They no longer list the debt per family but they do list the assets per citizen ($383,582) and the liability per taxpayer ($855,140). Notice how the liability per taxpayer is even bigger than the liability per family. Apparently we have fewer taxpayers than families.

Click here for a larger view

In late April 2016, usdebtclock.org says our official debt went over the $19 trillion mark and now we are at $19.276 trillion.

Incidentally, the website says there are 119.6 million taxpayers. It also says there are 161.75 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 (49.9 million) food stamp recipients (44.0 million) and disabled people drawing social security (10.8 million). I don’t think there is any overlap here. Those groups total 104.7 million and that’s why I say that they constitute a group that’s 87.4% 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 Normal

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.

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. In the S&P 500 Index chart below, for some strange reason, the red bars are showing up as dark green now.

The 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, it is now about as strong as its been in the last year… it was in bull territory about 11 months ago. Anyway, I’d expect the market to stay in limbo for some time but remember this bear to sideways market is in the S&P 500. Other markets are quite bullish. See the SQN report below. Right now the % range change shows the S&P 500 up 5.36% over the last 100 days.

The third chart shows market volatility moving down a few months ago and then traveling right on the borderline sitting between quiet and normal since then.

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 1.2%, the S&P 500 is up 1.63 (it’s just down slightly over the last 100 days) and NASDAQ 100 is down -3.00 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 May compared with two months back and six months back.

So at +3.0 we have a streak of three inflationary months in a row and our highest inflationary reading in at least several years. My guess is the Federal Reserve will raise interest rates for the second time in June. What the Fed has done so far has had little impact on the economy.

Part IV: Tracking the Dollar

The US Dollar Index was falling throughout most of March and April and went as low as 92. Now with the prospect of an interest rate hike in June it’s back up to 96. UUP was the weakest ETF in April among the 500 we track in the world market model. I guess that was a great sign to buy, however, I’m going to India for two weeks on June 8th, so you might want to invest in the Rupee now. (That’s just a joke, of course it is not advice!)

Click here for a larger view

Conclusion

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, that has pretty much continued in 2016. These market types are about the hardest kinds in which to make money.

The S&P 500 is up 1.6% on the month, but November through May is typically the most bullish time of the year while June through October is the most bearish time. Today starts June. It’s an election year and the market usually goes up in election years … but then again, look at who the likely candidates are. The Fed will probably raise interest rates this month and that should positively impact the dollar and negatively impact the stock market.

Lastly, I’ve been reading over and over again about how this market guru (e.g., George Soros) or that one is now very bearish on the market long term. I’m not sure what will happen this month but the prospect of the market turning into an immense opportunity to make money is exciting.

Trading books have not been selling at all (that’s why I haven’t published another one) and people are staying away from the markets in droves. This market has been driven by corporate buybacks and by the Fed putting cash into the market. The individual investor is not in the market at all. He/she is scared … and at a time when some of the best money can be made, but isn’t that typical?

We do not use market type to predict, just to tell us what is happening right now but the fundamentals would suggest that we are due for a significant bear market in 2016. Watch volatility. The market is sideways to slightly up, but volatility is also climbing slightly. If it climbs a lot more, the bear market will most likely 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 sideways normal. Right now, we are in a short-term rally. Who knows what it will be at the end of next month. Are you scared of this market with the amazing opportunities to make big money just ahead of us? Then you need to work on your psychological issue (fear makes it very hard to make money trading) and educate yourself so you can take advantage of the great opportunities ahead.

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.

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• Learn to plan your trading business and plan your trades more effectively for achieving the results you are trying to generate.
• Improve the probabilities for your success in trading
• Find out what key questions to ask in order to challenge your established market beliefs, logic, and mental structures for trading.
• Create a series of useful tactical checklists for daily and weekly use so you don’t miss common crucial items and keep your trading efficiency very high. Gain invaluable lessons from practicing systems thinking.
• Identify the few critical states in price action and how to plan how to take advantage of those when you find them.
• Develop your situational awareness skills by simply paying attention to what’s happening in order to evolve your strategy as well as exploit new opportunities.
• Understand how to construct trade scenarios in order to anticipate possible outcomes and reduce the chances for a “surprise”.
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Trading Tip

May 2016 System Quality Number^® Report

The SQN^® Report

by Van K. Tharp, Ph.D.

Click here to resolve formatting problems

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 equities markets across the globe by segment, region, and sector.

May looks much better than many previous months and although the dollar went up during the month, the long term trend has been down which is producing some of this positive effect because everything in the model is priced in the dollar. In the US and in Europe, everything is now green and yellow. Wow!

A little over half of the US major market segments are yellow this month and the rest are light green or slightly bullish. Money is starting to move into equities again. And except for Mexico, all of the other Americas are green, including Canada.

In our far left Asia region section of the model, both Taiwan and Thailand are green but most countries are yellow. The only brown (slightly bearish) is China.

Last month Europe was basically half yellow, half brown. This month it is mostly yellow with three green areas: the Netherlands, Russia and Emerging Europe. Interestingly, the latter two are green probably because oil is going up.

The US sector view is quite positive compared with what we have seen recently. Like the major US indexes, the sectors are mostly yellow and green. There are three brown areas and one red. The brown areas are Biotech, Pharmaceuticals, and Biotech and Genome. The red area is Volatility… it is going down. The green sectors include Building Materials, Consumer Staples, Energy, Industrial, Metals and Mining, Oil and Gas Exploration, Utilities, and Telecom.

There are now five green currencies. These include the Brazilian Real, the Canadian Dollar, the Japanese Yen, and the Chinese Yuan. The British Pound is brown and the US Dollar is still red (even though it was in an uptrend in May). 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 Market SQN scores for ETFs over 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 light green. Commodities, gold, silver, base metals, coal, steel, global water, agriculture and global agribusiness are now all light green. Only natural gas and livestock are brown, while oil and timber are yellow.

The top ranking ETFs in the database are now all dark green, with municipal bonds leading the pack. Four of the top ETFs are now over +2.0 compared with eight last month. Bonds still dominate (despite the potential of interest rate hikes), but some commodities are now in the top 15. Gold, Junior Gold minors, and the Yen have moved out.

The bottom ranking ETFs were all red two months ago, but this month only nine of them are red. And only three of those are worse than -1.0, however, they are not the same three as last month.

Summary

Now let’s look at the summary table which measures the percentage of ETFs in each of the strength categories.

Seven months ago 92% of the ETFs we track were either in bear or strong bear territory. That number was 78.3% five months ago, 74.3% two months ago, and it moved down to 40.1% in April. In May, we are now at 10.4%.

We are in a sideways market, but the world model picture looks much stronger because of what might be called a crash in the US Dollar. Volatility is still quiet so this market is not that dangerous — yet.

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.

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