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 markets have been quite strong since the Trump election. The Market SQN™ score is in strong bull mode for the 100-day period as it is for 200 days. The S&P 500 has actually shown 11 new all-time highs in the last 100 days.
In late April 2016, usdebtclock.org said our official debt went over the $19 trillion mark and now we are almost at $20 trillion. I have no idea why it dropped over the last month. Nevertheless, our politicians are doing their usual “wonderful” job of spending our money plus money they don’t have. Don’t expect Donald Trump to be any better.
Incidentally, website says there are 119.9 million U.S. taxpayers. I add together US Retirees (50.6 million) food stamp recipients (42.4 million) and disabled people drawing social security (10.6 million). I don’t think there is any overlap here. Those groups total 107.6 million and that’s why I say that they constitute a group that’s 89.7% of the number of taxpayers. I could also include all government employees (23.5 million) as among those supported by taxpayers - but they do pay taxes. Remember about 10% of the taxpayers (11.99 million) pay most of the tax revenue. By the way, the debt clock lists Medicaid, Medicare, and several other sources of benefits that I don’t include because I assume they are overlaps and thus lists 163.6 million people as receiving benefits.
That’s over half the population.
Part II: The Current Stock Market Type Is Strong Bull Quiet
The market type classification tells us what is happening today – not what is going to happen tomorrow. All through October, the market moved mostly sideways in a relatively tight range, however, since the election the S&P has been on fire. Both the SQN 200 and 100 are Strong Bull Quiet. The Market SQN for 50 days is Bull Quiet but we are going through a minor correction and the 25 day score is Bear Quiet.
Compare the price bar patterns to the Market SQN chart below. The Market SQN score has been neutral to bullish since June of 2016. In the last 97 days we have had 20 new all-time highs in the S&P 500 so the market has really been going up strongly — but there have been no new all-time highs since March 1st.
While volatility rose into the normal range in late September/early October for a few days, it has been deep in the Quiet range since then. Right now, there is little danger in terms of volatility.
The table below reports the three major US Indices levels through Friday March 31. All three market indices are up nicely for the first three months of the year. The S&P 500 is up 5.53% on the year, the Dow is up 4.56% and the NASDAQ 100 is up 11.77%. Are you up over 5% already for 2017? In our recent survey of Tharp Think followers who responded to our question of how you are doing, many people were afraid or waiting for a pullback to get into the market. I suspect that a flat January and the dip in the first half of March is about all you are going to get in term of a pullback. But this is not about prediction. It’s about what the market is doing.
Part III: Our Four Star Inflation-Deflation Model
My model has generated mostly deflationary scores for the last few years. Deflation means that stuff generally becomes cheaper. In 2016, however, the model shifted results to the inflation side, which means that stuff tends to get more expensive. Markets move in correlation to inflation/deflation trends so it can be helpful to track these trends.
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 out of a possible 4.0 is neutral — neither inflationary nor deflationary. We can now add the full XLF component back to our score as we have six months of data (highlighted) with the unadjusted price.
Part IV: Tracking the Dollar
The US Dollar Index remains strong because the Fed raised interest rates for the third time in March.
I found an interesting article about why not to expect the market to go down. The reasons included:
US equities are now one of the world’s highest-yielding securities at a 2.5% dividend. About 50% of the S&P 500 stocks now yield more than US Treasury Bond. Developed world debt is generally negative.
Oil price have probably bottomed but are low. And the savings are just beginning to be felt around the world and creep into the economy.
A weak Euro is eating at the earnings of large multi-national companies, but the cure for a weak Euro is a weak euro. So the worst many be behind for US exporters.
European QE is working.
Japanese stocks are among the world’s cheapest and the YEN will probably continue to fall for the rest of the year.
Interest rates are going up but not that much. We might see two 25 basis point hikes. And in our generally deflationary world there isn’t room for more rate hikes. Furthermore, rate hike will not impact high technology companies that generally don’t borrow.
US companies are still massive buyers of their own stock. And if Trump reduces the tax on repatriating profits to 10%, we could see a lot more of such buybacks.
Dividends are also going up strongly.
In summary, the traditional causes of recessions, interest rate spikes, oil price spikes are not close to happening at all. The only possible foreseeable danger to the market is if Donald Trump manages to get himself impeached.
In the meantime, we are in a strong bull market and starting to get a mild correction.
Until next month, this is Van Tharp.
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.
Last week, in the March 29th issue of the newsletter, Dr. Tharp republished a questionnaire to test your leanings toward believing in either an incremental theory or an entity theory of intelligence. A couple of astute readers communicated to us that something must have been wrong with the scale or scoring method (Thanks John and Dave!).
Dr. Tharp took a second look and agreed the scale was inadvertently reversed.
Use this link to revisit the test and use the new scoring.
Special event for Swing and Core home study users!
Swing and Core Systems Update!
May 4, 2017
Ken is excited to meet his elearners in person and update you on the latest developments to the Swing and Core systems you have studied, and maybe are already trading. Ken’s extensive market knowledge and energetic, dynamic teaching style offer attendees much more than just the one-day event. Read on for more details. . .
Very Special Benefits
Attendees will also receive:
A pre-workshop preparatory video lecture,
A homework package,
Ability to submit specific questions to Ken before the course, and
A follow up webinar afterwards.
This gives you numerous ways to learn the system updates and clarify any questions you have with Ken directly.
Students should walk through the VTI classroom door having studied each of the courses, and with some knowledge and experience with the systems contained within. Dr. Long will have a lot of new ground to cover during the course so he will concentrate on intermediate and advanced questions relating to the systems. To maximize everyone’s time in the classroom, Ken will focus on his latest discoveries, and as such he will be unable to re-teach content readily available in the elearning courses.
Ken will present the elearning course update, and on the following day, he will launch into teaching his new Adaptive Swing Trading Workshop. In this three-day intensive workshop, Dr. Long presents a series of advanced, adaptive swing trading systems and strategies that work well for holding periods from two days to two weeks.
Adaptive Swing Trading
May 5-7, 2017
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.
What is an Adaptive Trading System?
An adaptive trading system has rules and rule parameters that adjust to market conditions and price conditions rather than remaining constant.
As Van urges traders to watch the big picture and describe market character with some sort of classification system, Ken has such a system that he will teach at the workshop. He monitors a handful of standard and homegrown statistics to help him interpret the market and consider possible scenarios. He will describe both the calculation of the homegrown statistics and the usage of them so that the workshop traders understand them and can consider how to adapt them for their own use if they like.
What About “You?” Your Most Important Asset
Even though this is a technical workshop and not a Peak Performance event, Ken will talk a lot about what he does and what you can do to help yourself generate better results through various strategies.
One of the most effective self-development strategies Ken uses personally and many of his chat room traders also follow, is keeping a learning journal. A learning journal follows a specific format that was developed by leaders in the area of adult learning theory. The format and process employ some simple steps that better integrate your experiences, reflections, and follow up plans than anything else available right now.
If you ever get a chance to join Ken in the chat room, you will see him and the other traders make a nice win, endure a loss, and in either case — talk about getting to the “zero state.” This idea of state management is critical for being able to take the next action you need to — without lingering emotion from the last trade. Ken will go over some strategies he uses to manage his mental state and trade from the zero state.
Coaching from Ken After the Workshop
Once you are back home and studying or trading the systems you learned at the workshop, inevitably you will come up with some important questions.
After each Adaptive Swing Trading Workshop (and Day Trading Systems Workshop — coming in August), Ken provides three follow up coaching sessions to answer your latest questions.
In these online sessions, Ken interacts with the participants by sharing ideas and answering questions.
Also, Ken will host three coaching calls following the workshops, approximately one per month and if you can’t make a session, you can watch the recording when it’s convenient for you. These sessions are more than just Q&A as traders also share what’s working great for them and collaborate on ideas to make the systems even more robust.
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 a cross section of 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. I want to caution everyone that the US Dollar (UUP) had a Market SQN™ 100 reading of 0.76 at the end of March 2017. Since the entire World Market Model is based upon the US dollar, its strength could make foreign markets look much weaker than they actually are; they might be weak only relative to the strong US Dollar. However, the dollar is much weaker than it was two months ago.
All of the US equity market segments are dark green, even the microcaps. The other countries in the Americas are yellow and light green. Mexico is remaining brown. Canada and Chile are light green and Brazil and Latin America and Mexico are yellow.
As a region, Asia has become stronger. There is nothing weaker than India and Malaysia which are yellow. Singapore and Australia have moved from light green to dark green over the last month.
On the right hand side of the chart, everything in Europe is either light or dark green. France, Germany, the Netherlands, Spain, Sweden, the Netherlands, and the UK are all dark green, with Sweden being above 2.0. African countries, however, are still yellow.
In currencies, only the US Dollar is green — light green after having moved there from dark green two months ago. There are a number of reds — the Euro, the Yen, and the Swiss Franc. Despite Sweden’s stock market being dark green, the Swedish Krona is brown. The Japanese Yen is still the weakest currency.
In the US sectors, basic materials, consumer discretionary, financial, health care, homebuilders, industrial, semiconductors, technology, aerospace, broker dealers, insurance, media, networking, regional banks, and software are all dark green. That’s a long list of strong sectors. The only yellows are energy, oil and gas exploration, retail, and REITS. Volatility (remember this is Strong Bull Quiet market type right now) has the most negative score I’ve ever seen at -3.43. In fact, that’s the most negative score I’ve seen since doing the SQN reports.
This is what a strong bull quiet market in equities looks like.
Commodities, Real Estate, Debt, Top and Bottom Lists
Commodities have had an interesting month. Gold, agriculture, and natural gas are brown. Gold and silver are brown. Blended commodities, oil, natural gas, and coal are yellow. Global water, timber, livestock, and global agribusiness are dark green. The market believes in Trump’s infrastructure buildup promises.
With the Fed raising interest rates twice now and possibly again sometime soon, real estate is yellow (except China, which is light green). Long-term debt is red and short-term debt is brown, however, junk bonds are light green. Junk bonds are now the safety value of income.
The Top Ranking List:
What’s really interesting is the top ETF on the list: The Dow Jones Industrials with whopping 3.28 SQN. And three ETFs are above 3.0. All of the top ETFs are above 2.0 and they are mostly large indices.
The Bottom Ranking List:
This month’s bottom list is entirely red but only two ETFs show a score lower than a -2 — which is the best we’ve seen in a while for the bottom list overall. Volatility is lower than minus 3. Most of the weak ETFs have to do with debt instruments and their low yields.
Let’s look at the summary table which measures the percentage of ETFs in each of the strength categories. You can see the Jan 31st 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 —
At the end of January, the split for bullish/neutral/bearish ETFs was 25%/ 33%/ 43%. This month it’s more bullish at 59%/ 28%/ 13%.
Be careful to base your actions upon what IS happening, not what you think might happen. 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.
If you missed the new quizzes from Monday, these quizzes feature 2 live trades taken in the daily chatroom, that our traders have offered for review.
Our intention in this quiz is to analyze traders' performance compared to what their plan for the trade was, and then compare the execution of their plan to the intention. This has the same effect as studying a game film after a football game or soccer match and looking for opportunities not taken, or risks properly managed. It's the way we check compliance with our trading plan.
In these quizzes we invite you to look at the markup and see what you can see about the trades as they unfolded. Red dots are sells, green dots are buys; black boxes represent completed trades in the sequence.
Click on each of the images below to view larger.
We discuss this Quiz in our weekend report review in the 5 minute video below, where we continue our collaborative learning journey together.
About the Author: Dr. Ken Long retired from the Army as a Lieutenant Colonel and teaches at the U.S. Army Staff College. He is a proud father of three, a husband, teacher, student, martial artist and active trader. Ken also instructs dynamic trading workshops for the Van Tharp Institute.
Ken's next workshop is just around the corner. Watch this video to hear two testimonials from students of Ken Long.
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