The Van Tharp Institute

February 2, 2005 — Issue #205

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In this Issue:

March Workshop How To Develop A Winning Trading System Workshop
Feature Article 1

Market Update, By, Van K. Tharp, Ph.D.

February Workshop Learn to Trade Exchange Traded Funds. 
F-r-e-e Online Tutorial

Setups To Enhance Trading Performance, by Dr. Chris Anderson

Feature This Week Secrets of the Masters: Trading Simulation Game. Learn about Position Sizing Through Experimenting.
Tax Tip

Pension Contribution Limits Have Increased for 2005

Recommended Reading

Van Recommends The Marriage of Spirit to Help Reduce Self Sabotage

Forum Discussions

How Do I Get the Best Out of Peak Performance Course?

View this newsletter on-line, or read back issues

 

March Workshops:

 

How To Develop A Winning Trading System That Fits You Workshop

 

Van Tharp has been studying top traders and investors for over 20 years. In his research, he’s learned how the best traders and investors achieve peak performance. All of these traders and investors developed a sound methodology ¾ and one key portion of their success came from doing the right sort of research.

To duplicate their success, you must focus on the essential elements of system design while meeting your objectives. Therefore, a critical task of system development is developing sound objectives. 

After writing two Market Wizard books, Jack Schwager concluded that the most important characteristic of the top traders and investors he interviewed was that they had adopted a trading system to fit them. 

But to develop a system that fits you, you need to really think about what you want--what are your objectives. It’s not a trivial task. Come to the How to Develop a Winning Trading System Workshop and learn the important elements of system development.

"I’ve proven this formula in helping to develop top traders and investors. Now, I want to offer you the same incredible opportunity to make big money and I’ll take all the initial risk."¾ Van Tharp

 Learn More...

Feature Article 

Market Update for February 2005
Ending January 31, 2005

1-2-3 Model Still in Red Light Mode

By
Van K. Tharp

Look for these monthly updates in the first issue of each month. This allows us to get the closing month data.  In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book:  1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I:  Market Commentary.

Bear Markets have a way of really hurting the little guy who doesn’t know any better.  So let’s look at how that has happened in the first month of 2005.

First, we’re seeing merger mania.  Proctor and Gamble is buying Gillette for $57 billion to form the world’s largest consumer company.  Metropolitan Life is acquiring Travelers Insurance from Citigroup.  And the latest one is that one of the Baby Bells, SBC communications, is planning to acquire ATT.   There were seven original Baby Bells from the ATT spinoff.  Three of those (Ameritech, Southwestern Bell, and Pacific Telesis) are now SBC Communications.   Incidentally, do you remember that Cingular Wireless acquired ATT wireless?  Interestingly enough, Cingular is part of SBC Communications.

So what does this all mean?   Mergers tend to be fast and furious when markets are overvalued and everyone thinks the best way to grow more is to acquire other companies.

Another interesting thing occurred about a week ago.  In a single day, Delta airlines posted a record lost of $5.2 billion dollars, which amounted to $47 per share, for the last quarter of 2004.  That was a record loss for the airlines.   What happened to the stock?  It lost 9.8% of its share value to close at $5.37.   And as of today, it’s gained back much of that loss to close at $5.67.  I’m saying that, not because it is that interesting, but to give you a contrast.   On the same day that Delta announced record losses, another company announced record profits.  That company grew its profits about 44% from the previous quarter.  However, it did one thing wrong – it missed the analyst’s expectations by 1 cent – the first time it had ever done that.  What happened?  The stock plunged 20% during the next 24 hrs and it’s gone even lower since that time.  The stock with record earnings was Ebay.

And lastly the market still has very efficient stocks that people don’t seem to notice.  As an example, take a look at the stock of St. Joe (JOE).  It’s been slowing going up quite regularly. 

On February 1st, the SP500 has lost 2.5% on the year; the NY composite has lost 2.2% on the year; and the Wilshire 5000 and the Dow Jones Industrials had both lost 2.7% on the year.  The NASDAQ 100 had lost 6.7% for the year.   But just when you think run for the hills, the market has started to climb this week.

On top of that, the Federal Reserve has elected to raise interest rates again. This is the sixth interest rate increase since we went into Red Light mode last July.  Pretty soon, this will have an significant impact on the stock market.

The 1-2-3 Stock Market Model IS IN RED LIGHT MODE.   BE CAREFUL.

But before you make specific decisions on where to put your money, let’s take a look at what the market is doing.  Right now it is definitely going down.

Currently, all three averages are below their price five weeks ago.  However, the market is going down very slowly.   A 4% drop in a single week, could easily change the whole picture.  But so far, the 2005 market is a lot like last year.

Most of 2004 was characterized by almost no change in the markets at all.  January could just be a continuation of that.   Weekly changes for the major averages usually average over 2%.  In 2004, they have typically been under 1%.   I would not expect that to continue throughout 2005!

The table below shows the five week status of each of the major markets.

Dat

DJIA

% Change

S&P500

% Change

Nasdaq 100 (QQQ)

% Change

12/31/04

10,783.01

-0.4%

1211.12

+0.1%

1621.12

+0.5%

1/7/05

10,603.96

-1.7%

1186.19

-2.1%

1564.11

-3.5%

1/14/05

10,558.00

-0.4%

1184.52

-0.1%

1561.11

+0.2%

1/21/05

10,392.99

-1.6%

1167.87

-1.4%

1503.64

-3.7%

1/28/05

10,427.20

+0.3%

1171.36

+0.3%

1499.46

-0.3%

Notice that all three averages are down on the year.  But two of the three averages were up last week, although 0.3% changes are not that significant.   You could consider the bear market mutual fund strategy in Safe Strategies, if we have a significant down move this week (i.e., -2.5% or greater).   However, it might be better to just play efficient stocks like JOE or stocks in a clear downtrend like EBAY.  (Be careful, because EBAY was a very efficient stock on the upside at the end of 2004).  Internet stocks are also taking it on the chin so far this year with the USA today Internet 50 down nearly 8% on the year on February 1st.

Incidentally, this data is calculated by hand based upon last month’s close (i.e., January 31st), there is always a possibility of human error in our numbers.

Part III: Our Four Star Inflation-Deflation Model.

As mentioned in Safe Strategies, we are due (in terms of cycles) for a deflationary bear market.   And, indeed, there are major deflationary forces at work in the world today.  And these were listed in the book.

The United States at this time is a huge debtor nation.   Our government has the largest debt of any nation ever  (probably over 35 trillion including future obligations).  Our corporations have huge debt and individual also have huge debt.   As a result, the Federal Reserve has stated that it will do whatever it takes to make sure that we do not have deflation.   This means turning up the printing presses.

However, the printing presses are currently fighting the deflationary forces.  And the net result, right now is that inflation seems to be winning slightly.  Indeed, that was the Fed’s rationale for raising interest rates.  And with today’s announcement (February 2, 2005), we have the sixth interest rate increase since we turned to red light mode in July.

Let’s take a look at what the model is showing us right now.    Remember, the model says that the more stars, the more likely we are to have inflation.  Let’s look at those four factors.

Commodities Prices are definitely going up.   Commodity prices, as measured by the CRB, have been going up slowly since June of last year.  They went from 255.77 on the close in 2003 to 283.9 on the close in 2004.   That’s certainly a sign of inflation.  Some of that increase is due to the decline in value of the dollar.  However, commodity prices are usually passed through to the consumer so expect inflation.  It’s still strong enough to give us one star for inflation.

Consumer Price Index – Consumer prices, as measured by the government adjusted consumer price index are starting to heat up – much faster than most analysts have expected.  However, the governments “seasonally adjusted” figure for December was actually down a little.   We’ll call the CPI mixed and give it half a star for the long term trend.

Gold Prices – Gold hit a new high in November, but has been going down for the last two months.   I’d call this one neutral.

Interest Rates – Short-term interest rates are definitely going up, but long-term interest rates are still declining.   A thirty year fixed mortgage is actually 0.4% cheaper than it was six months ago.  This again points to inflation.   Thus, we have another star here.

What’s the net result?  We have 2.5 stars pointing toward inflation.   The inflationary scenario is weakening, but stay tuned.  Most of the inflationary figures are manipulated by the government, so the best we can do is estimate the underlying trend.

Part IV: Tracking the Dollar.

The dollar is neutral over the last few months.   It’s probably bottomed out against the Euro.  However, my guess is that it will continue to be weak compared with commodity currencies such as the Canadian Dollar, the New Zealand dollar, or the Australian dollar.  I’d still recommend putting some funds in the Max Yield Strategy for 2004 if you don’t do so last month.   Be careful here.   Follow the guidelines we set for you in Safe Strategies.

Fundamentals (i.e., with the main factor being the US debt) suggest that the dollar has a long ways to go on the downside.   However, we could have made that argument for much of the last ten years.   The dollar is once again looking very shaking and putting 20% of your portfolio in the max yield strategy makes good sense right now.

What this all means.

Our big picture continues to suggest that the stock market is a very weak place to be.  Be very careful.   We still expect a long term, inflationary BEAR market.  However, we might not see big declines for a while.  Right now a flat market looks fairly likely and an inflationary bear market looks like it is ahead of us.  We might not see a major decline until seasonal factors kick in at the end of the tax season.

 

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-deom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

 

New Trading Workshop

What are Exchange-Traded Funds?

They are funds that reflect the big sectors of the market.  For example, you can buy a fund that represents the Internet sector of the market and short another that represents the retail sector of the market.  And you can do this in seconds, as soon as you spot what the big money is doing.  So while big money might take a week to move money around, you can jump in ahead of them and take advantage of money flowing into the sector you’ve just bought.  The advantage is huge.

Learn six different strategies that allow you to take advantage of what big money is doing and turn it into big money for you.

 

Video Article

This week's F-r-e-e On-Line Tutorial

Setups To Enhance Trading Performance

Education brought to you in a brand new way.  
By Chris Anderson, PhD

Follow the link below and join us in this fun new way of learning.

 
C-l-i-c-k Below

On-Line Tutorial

 

Weekly Feature:

Secret's of The Masters

Trading Simulation Game

Dr. Tharp designed the "Secrets of the Masters™" Trading Game  to help you learn the secrets to trading success before you trade the markets. 

This game totally de-emphasizes entry or "stock picking" and instead requires that you focus on the most important aspects of trading—Position Sizing™ and letting your profits run. Our game has ten levels that get progressively more difficult to master. However, once you’ve mastered these principles, you’ll know you’ve mastered some of the key skills to trading success.

"I have found that it also helps you change the way you frame the activity of trading, because the game focuses on systems results and strips away entries, setups and the other false control illusions that traders inevitably get wrapped up in..."

 

Tax Tip

Tax Tip of the Week

Pension Contribution Limits Have Increased for 2005

by

Stephen S. Meredith, CPA, PLL

Pension contribution limits have increased again this year.  In recent years the amount you can contribute to your pension plan has increased with the objective of getting the various types of pensions to be similar in amount, benefits, and restrictions.  The 2005 limits were announced in November.  Below is a brief summary for the most common types of plans and some comments on due dates and other matters.

IRA/Roth limits are now $4,000, up from last year’s limit of $3,000.  There is a $500 “catch up” amount for these plans if you are over 50 years of age.  Deductions are limited based on income and must be paid by April 15 for last year.

Education Savings Plans remain at $2,000.  There is no “catch up” amount.  Each child can only have one contribution of $2,000 per year, so if grandparents set one up, the parents cannot contribute to one in the same year if the total would be over the limit.

Simple Plan contributions are increased to $10,000 this year, up from $9,000 last year.  There is a $2,000 “catch up” provision if you are over 50.  That is up from $1,500 last year.  So the total if you are over 50 is $12,000 this year compared to $10,500 for 2004.  Remember there is required employer matching in these accounts.  It is usually two or three percent of salary depending on the plan arrangement.  Small employers with modest salary may be better off with this type of plan than a SEP if it would give a larger contribution than the percentage of salary limits would allow.  You can contribute up to 100% of your salary to this plan! Do it for your spouse or kids!

SEP plans are increased to $42,000 this year, up from $41,000 last year.  There is also a 25% of salary limit so be careful not to exceed either limit.  The amount is an aggregate amount, so if you run more than one business and have a SEP plan in each business you are limited to an aggregate of $42,000 for the year.  If you have a 401(k) at another job you can still have a SEP, but the limits have to be met for the two plans combined.  The SEP plan limits are based on 20% of salary up to $210,000, or 25% of salary up to $168,000.  Self-employed people can only use the 20% of income figure so be careful.  SEP plans contain no “catch up” contribution amount.  This type of plan can be set up and funded at any time prior to filing your return for last year, including extensions!  If your cash flow is better in the summer, set the plan up and fund it when cash is available, and then file your return after the plan is funded.

401(k) plans consist of two parts – employee deferrals and company contributions.  The deferral amount is up to $14,000 this year from $13,000 last year.  The total amount, including company contributions is up to $42,000 this year, like SEP plans.  However these plans have a $4,000 “catch up” provision for the deferrals giving a total of $46,000 that can be contributed.  Some 401(k) plans need to have separate tax returns filed as well as actuarial testing for non-discrimination and top-heavy limits.  A plan administrator may charge $3,000 to $5,000 to manage the plan and file the returns.  The good news is that you can defer up to 100% of wages, like a Simple plan.

General note of importance - Proprietors, Partners, and S-Corporation Shareholders may have reduced percentages on some plans so be sure to check with your tax advisor before putting money into the plan.

Stephen S. Meredith is a CPA in Richmond Virginia.  He specializes in preparing income tax returns for all types of businesses, individuals, estates, and trusts.  He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws.  Steve deals with many stock market and real estate investors.  He has clients nationwide and lectures regularly on tax topics. He is often a featured speaker at Van Tharp's Infinite Wealth Workshop.

 

Recommended Reading:

Van Tharp Highly Recommends This Book to Help Reduce Self Sabotaging Behavior

The Marriage of Spirit - Enlightened Living in Today's World 

Author Leslie Temple-Thurston grew up in South Africa during the oppressive regime of apartheid. She experienced firsthand the extreme polarizations in human consciousness that divide people and drive them to the most inhumane policies and conduct. It created in her a desire to discover and to help heal the root cause of such divisions. Her search became a life-long spiritual quest that combined long periods of meditation and spiritual discipline with the study of ancient wisdom and modern psychology. She discovered, as have others before her, that these divisions are based on the polarizing structure of the human psyche. The Marriage of Spirit techniques are filtered through modern psychological thought and emerge in an original form designed for the more mentally oriented Western person. They are a simple and fast way to recreate balance and harmony in our ordinary, everyday living. They help us to bridge spiritually in the material world and bring us to greater levels of love, compassion and empowerment.  275 pages. $23.00

Order Book

 

Listening in....

Excerpts from Dr. Tharp's Mastermind Discussion Forum

How to Get the Best out of Peak Performance Course 
Author: RD
Date: 01-31-05 15:24

Hi All

I've just started the Peak Performance course, must say first day into it and found it hard to put the book away.... wow what a great definition on commitment in the first few sections.

Anyway what I'd like is for others to share their ideas on how they derived maximum benefit out of this course i.e. they studied everyday for 1hr in the mornings, they discussed the learning with someone every week, they applied to the course to their game of golf etc etc.

Just tips and techniques that others found useful..

Thanks and appreciate your feedback

RD

Reply To This Message 

Re: How to get the best out of Peak Performance Course 
Author: PMK 

Here is a suggested approach based on my experience of the (excellent) course.

First, a piece of advice that may be hard to follow (and is therefore likely to be good): if you are trading real money stop now and close all positions before you continue with the course. You will definitely be a superior trader after you finish the course, so why risk money when you are inferior. Also, you will likely discover serious omissions in your trading plan that need fixing, and it is also difficult to be objective about the course material if you have open positions. If you were studying to perform a new surgical procedure I am sure you would complete the course before attempting the surgery :-)

Now for the approach to the course. I would go through the entire course as quickly, but thoroughly as you can paying particular attention to the following points.

1 Any section that identifies an area that is missing from your current trading plan, or that you just did not think was important to trading.

2 Any section that invokes a strong negative reaction in you (difficult to complete, tedious, seems irrelevant, boring etc).

Next, I would address all the areas in 1 before resuming real-money trading.

Then I would go back through the entire course but paying particular attention to the areas from 2 above. You may need to spend significant amounts of time on this, and also purchase supplementary material to help you. Do not change your trading plan intra-day while you do this - only ever change your plan after the market has closed, and with good reason.

Once you have been through the course again and addressed the areas you were having difficulty with you should a) see a positive improvement in your trading discipline (i.e fewer implementation errors) and also have a much better idea whether trading as a business is for you.

Hope this helps

PMK




Read the full, unedited thread on the forum,   link here. (Hint for finding it, look at the heading and the date) Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other. Search specific topics 

 

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Quote of the Week:

"Every day, think as you wake up, today I am fortunate to be alive, I have a precious human life, I am not going to waste it. I am going to use all my energies to develop myself, to expand my heart out to others; to achieve enlightenment for the benefit of all beings. I am going to have kind thoughts towards others, I am not going to get angry or think badly about others. I am going to benefit others as much as I can." 
- The Dalai Lama 

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Feedback Corner: 


The ideas learned at the seminar are becoming more meaningful each day as I try to understand them more fully and actually use them. I have clearly changed some thinking about the market and in particular I'm paying more attention to the big picture rather than the day to day activities. It does provide a different perspective. Thanks for the seminar.

Tom Wersten

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Dr. Van Tharp's Trading Discussion Forum
  www.mastermindforum.com

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors.