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Market Update for the Period Ending September 30th, 2011
Market Condition: Strong Bear Volatile

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. If my beliefs and your beliefs are not the same, you may not find them useful. 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, then this information may not be useful to you. Thus, if you are inclined to perform 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. Know that I acknowledge that these are my beliefs and that your beliefs may be different.

These monthly updates are in the first issue of Tharp's Thoughts each month. This allows us to get the closing month's data. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp's Thoughts), 2) the five week status on each of the major US stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, and 4) tracking the dollar. Beginning this month, I will now report on the strongest and weakest areas of the overall market as a separate SQN® Report. And that may come out twice a month if there are significant market charges.

Part I: Commentary—The Big Picture

We are in a clear bear market within a secular bear market. And some of the issues involved in the last bear market are still at play. Big banks are in big trouble because of defaulting debt. Funds are selling everything that is liquid, so gold and gold stocks are going down. However, I don’t expect gold to go down any further.

QEII has ended and right now there is nothing but low interest rates to support the economy. Banks are not lending and part of that is people who have money are paying off debt rather than borrowing. And right now it looks like we could be in for another round of deflation.

Part II: The Current Stock Market Type Is Strong Bear Volatile

Each month I look at the market SQN® score for the daily percent changes over 200, 100, 50 and 25 days. For our purposes, the market is defined as the S&P 500 Index. The 25-day and 200-day signals are in bear mode, while the 100-day and 50-day modes are both strong bear. As you know, I generally track the 100-day SQN score, which is shown in the graph below.

chart 1

The next graph shows the market volatility over the last year.

chart 2

Volatility has quieted a bit, but that doesn’t mean that very volatile conditions won’t return again soon.

Here are the performance figures for the three major US indices over the last month. The indices were up heavily the first week in July and have been in a downturn since that time. The acceleration down was quite strong for the week ending July 29th.

Weekly Changes for the Three Major Stock Indices
  Dow 30   S&P 500   NASDAQ 100  
Date Close % Change Close %Change Close % Change
Close 04 10,783.01   1,211.12   1,621.12  
Close 05 10,717.50 -0.60% 1,248.29 3.07% 1,645.20 1.50%
Close 06 12,463.15 16.29% 1,418.30 13.62% 1,756.90 6.79%
Close 07 13,264.82 6.43% 1,468.36 3.53% 2,084.93 18.67%
Close 08 8,776.39 -33.84% 903.25 -38.49% 1,211.65 -41.89%
Close 09 10,428.05 18.82% 1,115.10 23.45% 1,860.31 53.54%
Close 10 11,577.51 11.02% 1,257.64 12.78% 2,217.86 19.22%
30-Aug-11 11,559.95 -0.15% 1,212.92 -3.56% 2,237.69 0.89%
7-Sep-11 11,414.86 -1.26% 1,198.62 -1.18% 2,223.75 -0.62%
14-Sep-11 11,246.73 -1.47% 1,188.68 -0.83% 2,252.75 1.30%
21-Sep-11 11,124.84 -1.08% 1,166.76 -1.84% 2,258.30 0.25%
28-Sep-11 11,010.90 -1.02% 1,151.06 -1.35% 2,220.84 -1.66%
Year to Date 11,010.90 -4.89% 1,151.06 -8.47% 2,220.84 0.13%

For the DOW and S&P 500, every week last month was down.  The NASDAQ 100 managed two up weeks and closed up slightly over the 2010 close.  But the S&P 500, which is probably the best overall measure of the US stock market, closed last month down 8.47% on the year.

Part III: Our Four Star Inflation-Deflation Model

Here is the data from our four star inflation-deflation model.

Date CRB/CCI XLB Gold XLF Score
Dec-05 347.89 30.3 513 31.7  
Dec-06 394.89 34.8 635.5 36.7  
Dec-07 476.08 41.7 833.3 28.9  
Dec-08 352.06 22.7 865 12.5  
Dec-09 484.42 33 1,104.00 14.1  
Dec-10 629.53 38.5 1,410.25 16  
Mar-11 672.81 40 1,439.00 16.5 +2.5
Apr-11 687.66 40.9 1,535.50 16.4 +2.5
May-11 656.42 39.8 1,536.50 15.8 +2.5
Jun-11 632.23 39.4 1,500.30 15.4 +0.5
Jul-11 645.77 38 1,628.50 14.8 +0.5
Aug-11 661.93 35.3 1,813.50 13.4 +0.5
Sep-11 571.38 29.4 1,620.00 11.8 -0.5

We'll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Month CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total
  Lower Lower Lower Lower Lower Higher Lower Lower  
Sept   -1   -1   +0.5   +1 -0.5

We were in a strong inflationary period until QEII ended, but now we are starting to move into a deflationary environment according to the model. I’ve added a column on the right to help you see the total score for the month.

Speaking of bank lending, the money multiplier situation had a nice upward trend until it got to about 0.8 and then it started down again. However, anything under 1.0 is terrible for the economy. Right now, this means that banks are lending about $78 for every $100 they have. Since the historical norm is about $300 loaned out per $100 of bank capital, you can see that this lending situation remains a serious hindrance on growth.

chart 3

The longer the money multiplier stays below one, the greater the compounded effect on the economy will be as businesses cope with limited access to capital.

The money multiplier is so low for two main reasons. First, many companies and people who normally borrow money are scared of deflation so they are paying off debt rather than taking on more debt. Of course, the other reason is that banks have stronger requirements for their balance sheets, so they are doing that in part by limiting their lending. Still bad loans are bad loans, and the financial industry looks terrible. Here is a monthly candlestick graph of the financial industry as represented by the ETF XLF.

chart 4

You can see several trends in this chart: the devastation caused by the last financial crisis in 2007-2008, the industry's very mild recovery, and then what’s been going on recently. We’ve had seven lower lows with the situation getting worse.

Shadowstats Statistics

I check the Shadowstats web site, which shows the “real” statistics as the government originally attended them. Remember that there are lies, damned lies, and statistics, and the government is a master at manipulating statistics to shape public opinion.

The government reports unemployment at between 9% (U3) and 12% (U6), while Shadowstats’ version has it about 22%.

The government reports inflation to be about 4%, while Shadowstats reports it at above 7%. Remember, Shadowstats uses the CPI calculation method the government used to report the inflation rate before it started manipulating data.

The government reports the GDP growth at about 2% and heading down now, but this is still positive so we are not in a recession. While the government uses their current inflation methodology to adjust its GDP rate, Shadowstats uses the real inflation rate to adjust its GDP calculation. Shadowstats shows GDP at -3% growth right now. Furthermore, it shows that the US has been in a recession since 2000 with the exception of the 4th quarter of 2003.

Lastly, the Fed stopped reporting the M3 money supply in 2006. M3, the total amount of money in circulation, had negative growth (it shrank) for 2010 and part of 2011. The latest figures—probably reflecting the last part of QEII—show only slight positive growth recently. Based on our data above, however, you can expect M3 to start shrinking again very soon.

Part IV: Tracking the Dollar

The Federal Reserve still needs to update their figures, so we’ll look at the US Dollar Index futures price chart to see what the currency market tells us. Most of the last month has shown a huge up movement in the US dollar. Why? First, the sovereign debt crises in Europe are causing concerns about the Euro. Second, we are beginning a credit crisis similar to late 2007 to early 2009. Everyone needed dollars then to pay down their debts, so the dollar climbed. That’s happening again now. The US dollar rose 5% in September, which was a great opportunity if you were trading Forex.

chart 5

General Comments

Warren Buffet is again making it sound like the economy is golden and this represents a time of real opportunity to buy bargains. He’s investing in the financial industry and buying back his own stock. To his credit, when you have billions and a very long-term perspective, this might be okay. But XLF is now around $11, and I’d expect it to test its prior low of about $6. That prior low represents a further decline of about 45%. Would you want that kind of holding in your portfolio?

Our statistics now show that we are in Strong Bear Volatile territory during a secular bear market. These are the worst market conditions for long-term investors. Are you ignoring what we’ve been saying for the last few months and still long in the equity markets?

Look at the monthly candlestick graph of the S&P 500. Do you want to be long in the US stock market right now?

chart 6

I’d certainly want to see the S&P 500 starting to base and then breakout before I’d consider long positions again in the US stock market. And that might be a long way away. By the way, this chart only goes back twenty-four months so it doesn’t show the March 2009 low on the S&P 500.

I personally believe that the secular bear market has at least 5-10 more years to go. Shadowstats (with accurate statistics) shows only one quarter in which the US hasn’t been in a recession since 2000 (4th quarter of 2003).

You should use the information in these monthly updates to determine which trading systems will work best rather than try to forecast the market. Which of your trading systems fit the current market type? The question implies that you have multiple trading systems and that you know how they perform under various market conditions. If you haven't heard this before or the other ideas mentioned above, read my book Super Trader, which covers these areas and more so you can make money in any kind of market conditions.

Crisis always implies opportunity. Those with good trading skills can make money in this market—a lot of money. There were lots of good opportunities in 2009. Did you make money? If not, then do you understand why not? The refinement of good trading skills doesn't just happen by opening an account and adding money. You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Financial market trading is an arena filled with world class competition. Additionally and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment, and the right training. Until the October update, 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 at  

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Trading Tip

September 2011 SQN® Report

I use the System Quality Number® (SQN®) score to measure the market performance of countries, currencies, commodities, and various equity sectors in this world model. The specific calculation I use is the SQN 100, which calculates the SQN score of the daily percent change for a 100-day period of the various ETFs we follow. Typically, a score over +1.45 is strongly bullish; a score below -0.7 is very weak. We use the following color codes to help communicate the strength or weakness of the ETFs:

  • Green (strongest): Those ETFs with scores that are more than one standard deviation above the mean (about 1/6 of the ETFs scanned).
  • Yellow (the next strongest): Those ETFs with scores above the mean up to one standard deviation (about 1/3 of the ETFs scanned).
  • Brown (weak): Those ETFs with scores within one standard deviation below the mean (about 1/3 of ETFs scanned).
  • Red (very weak): Those ETFs with scores more than one standard deviation below the mean (about 1/6 of the ETFs scanned).

The World Market Model spreadsheet below includes most currently available ETFs—including inverse funds—although there are no leveraged ETFs.

World Market Summary

The predominant colors for US market segments on the last report were 60% brown and 40% red. Those colors still predominate; however, the ratio this month has gone to about 70% red and 30% brown with two light greens (both based on the Japanese Yen) and two yellows (the US dollar and US utilities). The only dark green segment in the entire model is the market volatility index, which always goes up in bear markets.

I warned everyone about the potential for such terrible performance several months ago when we first hit bear market mode. Every country in the world and every segment of the US markets now are red with the exception of Japan (brown) and the NASDAQ in the US (also brown). While brown isn’t good, the broader model shows great weakness. In fact, the SQN® score for almost every country in the world is below minus 1. This is extremely bad for anyone who is stubbornly long in the markets (think Warren Buffet, for example).

sqn 1

View Larger Chart

The Japanese Yen is still the strongest currency and the US dollar is now second. Last month’s second and third strongest currencies, the Swiss Franc and the Yuan, are now third and fourth, respectively, but both were negative in September.

The next table shows the relative performance of commodities, real estate, and interest rates, plus the strongest and weakest areas of the all of the ETFs.

sqn 2

Last month, the strongest area was gold, but in the flight for liquidity, gold has turned yellow (pun intended). Even commodities and silver are now very negative.

The only strong area in the flight for survival, is the bonds sector. Even though our debt has been downgraded, people are still flocking to bonds with the long-term issues being quite strong. All forms of debt instruments are strong with the possible exception of junk bonds.

All the real estate sectors have turned from yellow to brown or red and are now very weak.

The top ETFs overall tend to be in long-term bonds. The weakest ETFs tend to be, well, almost everything.

What’s Going On?

We are in a strong bear market segment of a secular bear market. Another crisis in the financial sector is brewing as I illustrated in this month’s market update and this tends to affect almost everything. The US dollar has had a one-month rally because people are paying off debt and most debt is in US dollars.

In addition, the Fed ended QEII, so that money is not going into the stock market. We could easily be into a downleg that is worse than the one in 2008-9.

In the market update for September, I showed you a chart of the monthly S&P 500 going back twenty four months. Here is another monthly bar chart going back through 2007 and showing the bottom of the market. How would you read this? Is this a market you want to go long in?

sqn 3

Here are the other key factors driving the markets right now:

  • We’re in a secular bear market that will probably run another 4-9 years. And we may be due for another serious down move short term.
  • For several years, the St. Louis Federal Reserve’s web site has made available a published paper stating that the US is bankrupt. And compared to when that piece was published, conditions have only worsened.
  • According to, which publishes accurate statistics based on the original definitions (rather than manipulated ones that the government now uses), there has only been one quarter since 2000 (fourth quarter of 2003) when the United States was not in a recession.
  • QEII is complete, and we simply have a bandage on the US debt. The Fed seems to be suggesting that more stimulation is on the way; however, Fed stimulation does not work if the banks lend at less than 1:1, which has been the case for about four years now.

Things are serious.

The markets are in crisis mode. If you want to be in them, you should be a trader, not a long-term investor. Crisis always offer opportunities, but to capture those opportunities you MUST know what you are doing. We’d like to help you with that, if you’ll let us educate you. Trying to navigate these markets without such an education is hazardous to your wealth.

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 at  

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