I monitor market type because it helps traders understand which kind of trading systems they should be using right now. —V. Tharp
#871 January 3, 2018
  • Feature: December 2017 Market Update: Strong Bull Quiet Market Type, by Van K. Tharp, Ph.D.
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Feature Article

December 2017 Market Update:
Strong Bull Quiet Market Type
by Van K. Tharp, Ph.D.
Van Tharp
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 changes may mean the SQN Report comes out more than once a month.

Part I: The Big Picture

The equity markets finished the year in Strong Bull Quiet mode. The S&P has been in Bull or Strong Bull since early in the year. It’s been in this market type a long, long time. And that is the value of keeping an eye on the market type. This is the kind of market that can make the average person look like a genius. And, of course, the average person is still afraid of the market although more and more people are entering it.

Our market type classification system is descriptive of today’s conditions, not predictive of tomorrows. It’s like a trend. You know the direction, but you don’t know whether it will continue tomorrow.

Monthly Update chart1
The US National Debt has finally surpassed $20 trillion and has zoomed to 20.6 trillion. Federal spending is now listed at 4 trillion dollars for the last four months. Trump just fires his own people in the white house, not government employees. Right now there are 23.4 million Federal Employees which is pretty much the same as it’s always been.

Currently there are 120.9 million taxpayers supporting 103.6 million other people. Here I count retirees (51.4M, disabled, 10.5 million, and Food stamp recipients, 40.7M), however, the US debt clock lists 165.7 million people receiving some sort of benefit. I had to take social security last year, so I guess I’m one of them.

Part II: The Current Stock Market Type Is Strong Bull Quiet

The market has been bull (or strong bull) quiet for most of 2017. And at the end of the year, all four SQN scores were strong bull quiet. People should be fully invested in a modified buy and hold model (i.e., 25% trailing stop on everything). This is about as good as it gets and if you are not up about 20% or more in your portfolio in 2017, then something is wrong. And if you are not even in the market, something is really wrong.

The first graph shows the S&P 500 in weekly bars over the last year so it is easy to see bull market. By the way, we have had a bull market type for a long time now. Does it mean it will continue? No, it’s pretty much like a trend in that you never know when it will stop. But it has continued for a long time and had you invested appropriately you would have reaped large rewards.
Monthly Update chart2
Furthermore, the S&P 500 hit 33 all-time high days within the last 100 days, including 12 in the last month. That is not an atmosphere which should concern you.
Monthly Update chart3
This volatility is so quiet that I had to change the axis to go below 0.5 in order to show the line (now at 0.41) This is not the climate out of which bear markets arrive.
Monthly Update chart4
The table below reports the three major US Indices levels through the end of the year. The Dow is up over 25%; the S&P 500 is up nearly 20%, and the NASDAQ is up over 30%. Contrast that with what people are earning in their savings accounts, or what those who are predicting a bear market and sitting on the sidelines are making. How about you?
Monthly Update chart5
I added on an extra market that we track here, the price of Bitcoin. I think it has the potential to be significant in the future. And, of course, it only went up 44.82% from its price which I last listed on October 3rd. Hedge funds can now use leveraged instruments to invest in it and the CME just listed it as a futures contract on Halloween. The next step will be an ETF. However, the big things are newsletter campaigns to help you make a fortune in bitcoin. Palm Beach Confidential has about 140,000 people on a conference call scheduled for Thursday. Many of them will pay several thousand dollars for a newsletter to help them invest in a market that has a total capitalization that’s much less than Apple stock. Stansberry Research has launched such a newsletter as well as Motley Fool. In each case, the price of the newsletter is VERY expensive and the newsletter services are pulling in millions of dollars’ worth of subscribers. Be careful and watch for more information in Tharp’s Thoughts.

I decided to exclude DASCOIN because there is talk of it being a Ponzi scheme, but we’ll know about that one in the second quarter of 2018.
Monthly Update chart6
Is this table beginning to get your attention? Everyone is talking about Bitcoin, but Bitcoin pales in comparison with some of the other cryptos. Hopefully, you’ll be joining us on my crypto webinar on January 12th. We had a technical problem with the registration site for the webinar. So if you already registered for the webinar, you will need to register again to be able to join in.

Bitcoin was first introduced as a concept in a paper in 2008. As of early this year, it was well under $1000. Notice what’s happened to the price of gold as bitcoin has become more popular — even in scary times when one would expect gold to go up. And there are now around 1400 cryptocurrencies in existence, most of which will be deadly to your wealth if you own them.

We are now devoting one issue per month on the topic of cryptos in this newsletter, so this section will move to that issue in the future.

Part III: Our Four-Star Inflation-Deflation Model

Gold and builders and commodities are up over the last six month which produces an inflationary model score. See the historical numbers for previous years and the monthly figures for the last year below.
Monthly Update chart7
Monthly Update chart8
Our model has showed signs of inflation for the past 6 months. As a result, I took a look at the shadowstat.com data and noticed that the inflation rate, based upon how the CPI was calculated in 1980, still shows close to a 10% inflation rate.

Part IV: Tracking the Dollar

The dollar has more or less gone down throughout all of 2017. Perhaps it’s a Trump phenomenon. However, if you are a US citizen, notice that the dollar went down about 10% last year. If all of your wealth is in the US Dollar, then your net worth went down 10%. And it makes the big gains in the stock market about half as impressive as they seem.
Monthly Update chart9
Conclusion

Today, equities are in a Strong Bull Quiet market type. The market type has been either Bull Quiet or Strong Bull Quiet for many months. Does the market type have to change any time soon now that it has gone on so long? No. Will it change soon? Maybe. It will change sooner or later. When will we know? Only once it changes. Then, you might ask, why bother trying to figure out the market type if it doesn’t help you know what’s coming . . .

I monitor market type because it helps traders understand which kind of trading systems they should be using right now. Systems that perform well in a Bull Quiet market type should have been performing really well for most of the year — and right now. Bull Quiet type systems are relatively easy to design (think buy and hold with a trailing stop) but I would also encourage you to have trading systems for other market types. If the market were to switch to a Sideways Quiet type, you would stop using your Bull Quiet systems and start using your Sideways Quiet systems. Rather than trying to predict what the market will do and how to be proactive with your positions ahead of the market, know the market type and trade the appropriate systems.

This approach makes a few assumptions —

  • You have a market type classification system and you use it. My market type classification system works well for me but it may not fit you. If that’s the case, how would you go about describing and classifying market conditions? And you should really understand it and the implications of the meaning it is giving you.
  • You understand trading systems. You know the parts, the purpose of each, and how they work together well. You understand the system’s edge and the beliefs behind it that enable the system to profit.
  • You have a trading system development process and can develop one or more systems for each market type. Most people try to create a trading system that performs well all the time. If that’s what you have been trying to do, save your time and effort — focus on one particular set of market conditions per system.
  • You trade one or more systems created for the current market type. (Some trading systems may perform best in one market type but will also perform acceptably well in one or two other market types.)

I can’t believe how many headlines I’ve heard about a potential crash happening soon. One of the better traders I’ve known has performed miserably this year because he believes we are in for a bear market crash. But look at the market type. What’s the market doing right now. It’s Bull Quiet. PERIOD.


Until next month, this is Van Tharp.
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Cryptocurrencies Webinar January 12th!
I am only opening this webinar to our newsletter subscribers — not the general public. This material requires the adoption of a certain level of market psychology, and even if you have thus far only read my weekly newsletter, Tharp’s Thoughts, the concepts we share here are enough to engage in the call. For example, as a newsletter reader you likely have a basic understanding of concepts like:

  • You don’t trade the markets, you trade your beliefs about the markets.
  • Or, how YOU are the most important factor in your trading and that taking personal responsibility for all of the things that happen in life.

These concepts, and the other Tharp Think principles that I have shared over the years, lead you to be empowered in the markets. This collection of articles, distributed weekly, arms you with more knowledge than the general public has about their own beliefs. Understanding and adopting these types of beliefs are crucial before you consider stepping into the virtual currency markets. Most people will lose their shirts in this area because as many as 70-80% of the coins and tokens out there could be scams. One of the top performers in 2017 has risen $0.12 to over $400 but it is an obvious scam and we’ll discuss that one in particular. You have to be able to avoid the scams.

In this webinar, I will cover how cryptocurrencies line up with my teachings about infinite wealth. I’ve heard that many people are saying that cryptocurrencies are not real, they’re just something other people made up. To that end, no money is real. It’s all something someone made up! Almost all currencies in the world today are flat currencies. That means nothing backs them up, not gold or any other physical commodity. A piece of paper we call a dollar bill is worth something only because the government says it’s legal tender and we all agree. Ideas like this are part of understanding infinite wealth. It’s all about playing a game. The games are all made up and if you get that, then you can make your own game with your own rules and win! This is the basic psychology of infinite wealth.

This is your chance to participate in something exciting with like-minded traders, including many of our Super Traders! I hope you will be able to join us for this opportunity!

Van

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Trading Tip

December 2017 System Quality Number® Report
The SQN® Report
by Van K. Tharp, Ph.D.
Van Tharp
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 Market SQN scores > 1.47
  • Light Green: ETFs with strong Market SQN 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.
The US Dollar is no longer the weakest currency that we track and its moved to brown. And since the world model is totally valued in the US dollar, everything should be increasing relative to the dollar.

Overall, the US market segments look much like last month. It's yellow and green. The Dow is dark green, and it’s one of the strongest ETFs in our database. SPY is also dark green. In the Americas geography, country market scores are all positive — either yellow or green, except Mexico which is red. Canada and Chile are both light green. Global equities ex-US and emerging markets are both light green.

Asia is also mostly yellow. Thailand and Japan are very strong. South Korea and Singapore are light green, and Taiwan is brown. Pay attention to Japan because it has been a relative weak stock market for a long, long time.

Europe is quite mixed. Austria, France, Germany and the UK are all light green. Belgium, the Netherlands, Russia, and Switzerland are yellow. While Spain and Sweden are brown. Emerging countries on that side of the chart are quite strong.

We have no red currencies this month although the Yen vs the US Dollar is red. The pound (and the recently added Bitcoin,) are strong. But everything else is yellow or brown.

In the US stock market sectors, basic materials, consumer discretionary, energy, homebuilders (one of the strongest), industrial, metals and mining, aerospace, broker dealers, gaming, and transportation are all very strong. Telecon, utilities and, of course, volatility are the only weak sections. Everything else is ether yellow or light green.
SQN Chart 1
Commodities, Real Estate, Debt, and the Top and Bottom Lists

Commodities are a mixed bunch again. There is one red sector, agriculture. Natural gas is brown. Gold, silver and livestock are neutral. Everything else is green. Timber, global agribusiness, and commodities as a whole are dark green.

Real estate is mostly neutral, with the US being stronger than China. Real estate is sort of interesting. In my area, inexpensive houses have increased in price a lot. However, more expensive houses, are selling at prices that are not much over their price 20 years ago. My house, for example, is probably about double what I paid for it 28 years ago, but that doesn’t even make up for inflation.

However, there is a good side to that. My wife and I are buying a new house that’s an upgrade, and the people who we are buying it from, are just about breaking even from what they paid for it 18 years ago. Here are a couple of snapshots. We close the middle of next month. It’s been on the market almost a year.
SQN Chart 2
All of the government interest rate products are neutral or brown or, in the case of short term interest rates, red. The strength here is in corporate bonds which are still just light green. As you know, as interest rates go up, prices of bonds go down.

The Top Ranking List:

The top ranking list has one ETF above 3.0 — the Dow 20. And all of them are above 2.0. These are all ETFs that we have recently added to our database. I’m not seeing any significant trends here. However, there are a lot of different countries represented such as: Thailand, Latin America, Vietnam, Argentina, and Germany. And at the bottom of the top, I’m surprised to see an oil ETF.
SQN Chart3
The Bottom Ranking List:

This month’s bottom list is similar in that many of the ETFs that appear are newer ones such as Pakistan. Interest rates are showing up. But some of the same items remain such as the VIX, and some of the commodities (corn), etc. However, none of the bottom ETFs are below minus 2.
Summary

Let’s look at the summary table which measures the percentage of ETFs in each of the strength categories. You can see the distribution of the database by Market SQN score in bullish, neutral and bearish categories just below with the August 31 figures at the bottom of the table
SQN Chart4
There is no real trend in this data. The market is fairly strong and staying there.

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.

Until next month this is Van Tharp.
January 2018 - US
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