#809 November 2, 2016
Tharp's Thoughts
Weekly Newsletter
  • Feature: October 2016 Market Update: Neutral Quiet Market Type, by RJ Hixson for Van K. Tharp, Ph.D.
  • Workshops: Dates Set for January 2017 Schedule
  • Tip: October 2016 System Quality Number™ Report, by RJ Hixson for Van K. Tharp, Ph.D.
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Feature Article

October 2016 Market Update:
Neutral Quiet Market Type

by RJ Hixson for Van K. Tharp, Ph.D.

Van Tharp

Click here to resolve formatting problems

If the recent equity markets’ “inactivity” has lulled you into some complacency, ATTENTION — It’s Time to Wake Up! Changes in market conditions are likely in the coming weeks or months — even if we don’t know what those changes will be. One of your duties as a trader is to stay aware and remain prepared.

For immediate attention, consider possible market scenarios for the various election outcomes. Clinton winning the White House and Democrats winning Congress would have a far different impact on the economy and markets than a Trump presidency with a Republican majority in the Congress. Regardless of any particular election day outcome, however, consider how you will react if market volatility picks up short term. How would you react to longer term volatility? What will you do if the stock market becomes directional in the short term or continues to move in that direction for the intermediate to long term? If you have a big picture process and trading systems for the different market types, a change in market conditions is not so scary, it's just another set of variables to manage.

"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." —V.K.T.

Part I: The Big Picture

So what are the markets telling us now?

The 100 day Market SQN score shows a sideways moving market with low volatility right now - but you don't need an indicator to learn that, just look at the S&P 500 chart. Meanwhile, the 200-day Market SQN score shows Bull while both the 50-day score and 25-day score show Bear. If the shorter term measures continue in Bear mode, they will pull the 100-day measure down into the Bear range soon. Conversely, if the shorter term scores improve to Neutral or Bull, the readings in the 100-day period would likely stay sideways for some time.
Watching the usdebtclock.org’s website for a few minutes can be mesmerizing and confounding as the surrealistically large numbers jump at a blistering pace. In this election cycle, the national debt and federal budget deficit have received very little attention. They appear to be minor issues or even non-issues for politicians and the voting populace. Until interest rates start to tick up, this may very well remain the case.

Part II: The Current Stock Market Type Is Neutral Quiet

Van’s market type classification tells us what is happening today — not what is going to happen tomorrow. All through October, the market has continued to move mostly sideways in a relatively tight range. You can see that fairly easily just looking at the S&P chart below of weekly bars going back one year —
The index has been almost flat since July. Compare the price bar pattern to the Market SQN chart below. As the uptrend from the February through July period transitioned into the flat period from August to today, you can see the Market SQN score weakening from Bull to Normal. If the market continues to drift sideways or down in November, we could see the score move into Bear territory by the December update.
While volatility rose into the Normal range in early October for a few days, it settled back into the Quiet range for the remainder of the month.
If you needed any confirmation of the quiet conditions, consider that the S&P is up .5% from 100 days back (early June) and is now off of its all-time high in early August by only 2.9%.

The table below reports the three major US Indices levels through Friday, October 28. All three market indices are up for the year — between 4% and 5%. Has your trading in 2016 generated market-beating performance figures? Hopefully so.
Part III: Our Four Star Inflation-Deflation Model

Van’s model has generated mostly deflationary scores for the last few years. Deflation means that stuff generally becomes cheaper. In 2016, however, there has been a shift to inflation which means that stuff tends to get more expensive. Markets move in correlation to the trend in inflation/deflation so it can be helpful to track it.

The tracking table below has historical and current year figures.
Here are the model components and how the prices looked at the end of February compared with two months back and six months back.
The score of +0.5 out of a possible 3.0 still indicates an inflationary environment though it’s not as strong of a score compared to much of this year.

Note: XLF recently had a stock split and declared a dividend. As a result, Van will only use three components of the model until he has six months of adjusted XLF data – which will be highlighted in yellow.

Part IV: Tracking the Dollar

The US Dollar Index still trades within a long term sideways zone. In October, though, it broke out of a short term range and exceeded 99 last week. Are currency traders fearful about other currencies or just more confident in the USD recently? As Van likes to say, “Who knows?” We can say the dollar is on a short term uptrend right now.

Since August, equities have been relatively quiet — maybe even a little boring. I have heard one interpretation for the continued stability and strength of the equity markets recently — big money believes we will get more of the same after the election and indicates a Clinton win next week. Even with the most recent FBI announcement on Friday about the ongoing investigation into her family's foundation, polls still put her comfortably ahead of Trump in the electoral college vote count.

Could there be a “surprise” outcome in next week’s election? The final tally for the Brexit vote shocked many — especially the pollsters and bookies who were confidently predicting a UK vote to stay in the EU. Polls predict but votes decide and we won’t know the final vote count until late November 8 or early November 9. Again, be prepared.

Van will return from his travels in time to write the December Market Update.
About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his 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 www.vantharp.com.


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Trading Tip

October 2016 System Quality Number Report
The SQN Report
by RJ Hixson for Van K. Tharp, Ph.D.

Click here to resolve formatting problems

There are numerous ETFs that 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. I 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. This month, the model showed weakening prices pretty much across the board. There’s only one green ETF (QQQ) left in the US market segment matrix while last month, there were five segments showing strength.

Only one global region improved over last month — the Americas (but not the US). Indeed, Brazil, Chile, and Latin America overall have turned green while the Market SQN scores for Mexico and Canada improved from last month and are now yellow.

As a region, Asia lost some green countries and added some brown ones since last month — with no dark green markets left.

Last month, the markets in all of Europe were solid yellow with one light green issue, Middle East/Africa. This month, it’s about half yellow and half brown and with no green.

The US sector view has turned from green and yellow to yellow and brown. Semiconductors and Technology (XSD+XLK) are the only two green sectors left while Volatility (VXX) remains red — as it has been for the last few months.

Over in currencies, what was brown at the end of September has turned mostly red. Perhaps not surprisingly, the USD (UUP) has turned green. The Currency Harvest (DBV) remains dark green indicating the carry trade strategy has continued working well. Two currencies in addition to USD remain green — the Brazilian Real (BZF) and the JPY/USD pair (JYN).

Commodities, Real Estate, Debt, Top and Bottom Lists

Commodities run the spectrum this month from very strong to very weak but remain mostly weak with one notable exception – Coal. In fact, Coal (KOL) is actually the strongest ETF in the entire database this month (like last month) with an exceptionally strong Market SQN score of 2.54 indicating it has continued to rise with relatively little volatility. Steel and Base Metals are green but the rest of the issues are yellow, brown, and red. Livestock and Agriculture are very weak even making the bottom ETF list.

Chinese real estate is still doing well but all of the other real estate issues have turned brown.

Every debt instrument weakened over the last two months ago with only Junk Bonds remaining green – but with a weaker score.

The Top Ranking Lists:

Only the top two ETFs in the database are dark green. Contrast this with the last two month’s lists where every one of the top fifteen were all dark green. The makeup of the top list has become more diverse from the middle of the year with fewer muni bond ETFs on the list – though there are some still there.

The bottom ranking list:

This month’s bottom list is entirely red. That’s up from four red ETFs two months back and ten last month. As Van pointed out last month, the worst performers list inclusions would indicate life on the farm is not so great right now (with WEAT, COW, and DBA) . For the first time in a while, pharmaceutical and healthcare ETFs are now on this bottom list, perhaps in reaction to the potential for additional regulation by the presidential candidate currently ahead in the polls.

Let’s look at the summary table which measures the percentage of ETFs in each of the strength categories. You can see this month’s figures for the distribution of the database by Market SQN score in bullish, neutral and bearish categories just below.
This table has the database distribution for nearly the last four years —
Last month, the split for bullish/neutral/bearish was 30%/60%/10%. This month we have 12%/45%/45%* — a marked move from a bullish neutral picture to a neutral bearish picture. If you study the figures above, you can see this shift from bull to neutral to bear has actually been in progress since June – though this month, the numbers just tipped the balance from neutral over into a neutral/bearish split. Perhaps the world market model is leading the S&P Market SQN score by a month or so? Check back next month to find out.

While leaning neutral/bearish, the database overall is far from the weightings we have seen in its true bear months of the previous few years.

As Van repeatedly points out — be careful to base your actions upon what IS happening, not what you think might happen.

As Van also points out often, his monthly update above and this model measure what’s happening now rather than predict what will happen. Right now, the global picture is shifting bearish. Does this mean we will have a bear market? No, though some would say that the current shift increases the likeliness of that scenario. The question for you to answer is: What does a shift to a more bearish picture around the globe mean for your trading now?

*(If you wonder why the summary numbers add up to a figure other than 100% exactly, some of the ETFs in the database have price data issues occasionally and others have “died” which can throw the calculations off slightly.)

Van will return for the SQN Report in early December.

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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