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Tharp's Thoughts Weekly Newsletter

Article: December 2015 Market Update: Bear Normal Market Type, by Van K. Tharp, Ph.D.
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Tip: December 2015 System Quality Number^® Report The SQN^® Report by Van K. Tharp, Ph.D.
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Feature Article

December 2015 Market Update:
Bear Normal Market Type

by Van K. Tharp, Ph.D.

Click here to resolve formatting problems

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.

However, if your beliefs are not similar to mine, then this information may not be useful to you. Thus, if you are inclined to do 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. Just 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. 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. 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: The Big Picture

Over the last 100 days, the market went up 2.86% though we are now in a bear market type. Throughout December, we had 4 days of neutral (sideways) direction but the rest was all bear. Volatility, however, did not pick up that much in December.

The short term market type based on the 25 day Market SQN score is Bear Normal, the 50 day market type is Neutral Normal, and both the 100 and 200 day market types are Bear Normal.

By my classification system, the market spent several months in bear territory starting in late August but the most it was ever down was about 10%. Thus, that period never had what people call an official bear market — when the market is down 20% or more. That could easily happen in 2016, however, because the Federal Reserve started raising interest rates in December.

Debt Clock

The State of the United States
Month Ending	National Debt	Federal Tax Revenue	Federal Spending	Trade Deficit	Debt Per Family	Unfunded Liabilities	Taxpayers	People supported by them
July 31 2012	$15.93 trillion	$2.364 trillion	$3.632 trillion	$810 billion	$684,405
Dec 30 2012	$16.42 trillion	$2.452 trillion	$3.540 trillion	$740.7 billion	$732,086
July 31, 2013	$16.89 Trillion	$2.73 trillion	$3.535 trillion	$703 billion	$748,458	Unfunded Liabilities	115.2 million	109.9M 95.4%
Dec 31, 2013	$17.27 trillion	$2,82 trillion	$3,480 trillion	$692 billion	$751,294	$127.2 trillion	115.0 million	108.5M 94.3%
Aug 31, 2014	$17.70 trillion	$2.97 trillion	$3.53 trillion	$706 billion	$757,297	$118.0 trillion	116.5 million	104.5M 90.0%
Dec 31, 2014	$18.04 trillion	$3.08 trillion	$3.57 trillion	$713.2 billion	$733,741	$92.5 trillion	117.3 million	104.4M 89.0%
Jul 31, 2015	$18.32 trillion	$3.15 trillion	$3.65 trillion	$723.4 billion	$753,212	$97.2 trillion	118.7 million	105.0M 88.4%
Aug 31, 2015	$18.37 trillion	$3.16 trillion	$3.66 trillion	$729.7 billion	$753,533	$97.5 trillion	118.9 million	104.9M 88.2%
Sep 30, 2015	$18.41 trillion	$3.18 trillion	$3.68 trillion	$726.6 billion	$800,855	$97.7 trillion	119.0 million	105M 88.2%
Oct 31, 2015	$18.43 trillion	$3.26 trillion	$3.70 trillion	$736.9 billion	$805,560	$98.8 trillion	119.2 million	105M 88.1%
Nov 30, 2015	$18.71 trillion	$3.29 trillion	$3.72 trillion	$732.4 billion	$810,044	$100.3 trillion	119.4 million	105.1M 88.0%
Dec 31, 2015	$18.51 trillion	$3.30 trillion	$3.74 trillion	$731.1 billion	$789,359	$100.7 trillion	119.6 million	105.1M 87.9%

So in 2015, usdebtclock.org says our official debt went from $18.04 trillion to $18.51 trillion or up by $470 billion. Furthermore, the tendency for the government to manipulate our unfunded debt amount seems to have tapered off as it’s now the highest it’s been since November 2014 and has gone over $100 trillion again.

Part II: The Current Stock Market Type Is Bear Normal.

My market type classification is not predictive but rather descriptive. Rather than telling us what’s going to happen, it simply tells us what’s going on now — which looks like a trend. You can say, well, it’s going down, however, that doesn’t mean that it will keep going down. In a few days, that trend might change.

The graphs below include a chart of weekly bars for the S&P 500 over the last year, the Market SQN^® score for 100 days, and the ATR percent volatility.

While the market was in bear territory for about four months, it spent most of 2015 in neutral.

The third chart shows that this is not a regular bear/sideways market because about half of 2015 was spent in the green area which is a normal amount of volatility on a historical basis. The market spent some time in the quiet area (blue) but when it made its 10% decline, it entered the volatile category.

Below is a chart of the recent weekly changes in the three major US Indices. The NASDAQ 100 finished up 8.4% for the year, while the S&P 500 was down 0.73% and the DOW 30 was down 2.38%. Just like the market type, 2015 was a flat to slightly down year. It’s very hard to make money trading a sideways to slightly down market without much volatility.

Part III: Our Four Star Inflation — Deflation Model

In the simplest terms, inflation means that stuff gets more expensive, and deflation means that stuff gets cheaper. There’s a correlation between the inflation rate and market levels, so understanding inflation and deflation can help traders understand some important big-picture processes. See the tracking table below for the price levels of the model components.

Date	CCI> DBC	XLB	Gold	XLF	Total Score
Dec ‘05	347.89	30.28	513	31.67
Dec ‘06	394.89	34.84	635.5	36.74
Dec ‘07	476.08	41.7	833.3	28.9
Dec ‘08	352.06	22.74	865	12.52
Dec ‘09	484.42	32.99	1,104.00	14.1
Dec ‘10	629.53	38.47	1,410.25	16
Dec ‘11	564.37	33.5	1,574.59	13
Dec ’12 CCI>DBC	556.08 27.79	37.54	1,564.80	16.39	1
Dec ‘13	25.66	46.22	1201.50	21.86	-1.5
Dec ‘14	18.45	48.59	1199.25	24.73	-3.0
Jan ‘15	17.40	47.69	1260.25	23.01	-3.0
Feb ‘15	18.17	51.49	1213.70	24.35	-1.0
Mar ’15	17.01	48.78	1187.00	24.11	-3.0
Apr ’15	18.29	50.42	1180.25	24.13	-1.5
May ‘15	17.71	50.61	1190.50	24.60	+0.5
Jun ’15	18.00	48.39	1176.00	24.38	-1.0
Jul ’15	15.73	45.94	1098.40	25.18	-2.5
Aug ’15	15.69	43.36	1135.00	23.42	-2.5
Sep ‘15	15.15	39.95	1114.00	22.66	-2.0
Oct’ 15	15.20	45.28	1142.35	24.08	-1.5
Nov’ 15	14.19	45.57	1061.90	24.56	-2.0
Dec’ 15	13.36	43.42	1062.25	23.83	-2.0

Here are the prices at the end of September compared with two months back and six months back.

Month	DBC2	DBC6	XLB2	XLB6	Gold2	Gold6	XLF2	XLF6	Total Score
	Lower	Lower	Lower	Lower	Lower	Lower	Lower	Lower
Dec 15		-1		-1		-1		+1	-2.0

According to our model, every month during 2015 except for May was deflationary. Yet despite that, the Federal Reserve has started to raise interest rates which — suggests a down market for 2016 and more deflation. Banks are still not lending money — which is a deflationary force. The chart from the St. Louis Fed’s website shows the M-1 money multiplier is about 0.8 which means banks are lending about 80% of the money supplied by the Fed - slightly up from November’s data. It needs to be much higher than that, however, to really stimulate the economy (and bring back inflation). For perspective, the money multiplier was around 3 for much of the 1980s.

Part IV: Tracking the Dollar

The US Dollar Index has gone down about 2 points since its highs in late November but it is still in a general uptrend and I’d expect that to continue if the Fed continues to raise interest rates.

Click here for a larger image.

Conclusion

The market spent almost all of 2015 in the neutral or down categories. Volatility for most of the year was normal or quiet. The major US Index, the S&P 500, closed down just under 1% for the entire year. Although faulty, my memory is that much of last year was pretty much the same. As a result; I decided to make up a table of the market type was for each month of the year to see how many of monthly market types were actually the same.

Month	Market Type Observed	Change	Amount of Change
Jan 2015	Sideways Quiet
Feb 2015	Bull Quiet	Yes	+1
Mar 2015	Sideways Normal	Yes	+2
Apr 2015	Sideways Quiet	Yes	+1
May 2015	Sideways Quiet	No	0
Jun 2015	Sideways Quiet	No	0
Jul 2015	Sideways Quiet	No	0
Aug 2015	Bear Quiet	Yes	+1
Sep 2015	Bear Volatile	Yes	+2
Oct 2015	Bear Quiet	Yes	+2
Nov 2015	Sideways Quiet	Yes	+1
Dec 2015	Bear Normal	Yes	+2

So remember that the observed column above has the market type on the last day of the prior month. Overall we said the market direction was sideways in seven months, bearish for four months and bullish for one month.
Volatility was quiet for nine months, normal in two months and volatile in just one month.
We had four straight months of no change in type when the market was Sideways Quiet.
We had four months in which there was just one change in the market type (i.e., quiet to normal or bull to sideways).
And we had four months in which there were two changes in market type (i.e., quiet to volatile; or both volatility and direction changed one unit).

Now I generally state that market type is not a prediction but an observation of what is happening. With changes in market type for eight months in 2015, that’s seems to remain the case. The entire year also had pretty similar market conditions - we had a sideways direction in seven of the twelve months and quiet volatility in nine of the months.

As I have said many times over the last year, notice what the market is doing now. Right now the market is Bear Normal. Can you make money in a Bear Normal market? If yes, then do what you do. If no, then your best bet is probably cash.

Until next month’s update, this is Van Tharp.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and 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 www.vantharp.com. His new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.

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Trading Tip

December 2015 System Quality Number^® Report
The SQN^® Report

by Van K. Tharp, Ph.D.

Click here to resolve formatting problems

There are numerous ETFs that now 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. Consequently, I now 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 ratings that we use for the Market SQN® Score. The world market model spreadsheet report below contains most currently available ETFs excluding inverse and leveraged funds. In short, it covers the geographic world, the major asset classes, the equity market segments, the industrial sectors and the major currencies.

World Market Summary — Equities & Currencies

Each month, we look at the equities markets across the globe by segment, region and sector. Once again the world is mostly brown and yellow. But part of this might be due to the rise in the US Dollar which would cause the rest of the world to seem to be going down (i.e., as their currencies depreciate).

This month the equity markets across the Americas are worse than last month. All of the US market segments are brown except for DIA and QQQ which are both slightly positive. All of the rest of the Americas — Mexico, Canada, Latin America, Brazil, and Chile are all red — meaning down a lot.

In Asia everything is brown except for two reds - India and Singapore (way down) and two yellows — China and South Korea. It’s not a promising picture for buy and hold. Remember that this is in the face of a stronger dollar.

In Europe, everything is red except for three browns (moderately down) in Austria, Russia, and Sweden and one yellow Belgium. This is a much weaker picture than we saw last month.

With a strong dollar, US sectors should be doing well but there are no green sectors at all. The view shows mostly yellow or brown and there are five red areas — Metals and Mining; Oil and Gas Exploration; Gaming; Retail (despite the Christmas season just ending); and the Dow Transports. The strongest US sector is Volatility — which means that although the market type shows just a normal level of volatility on a historical basis, volatility has gone up over the last 100 days.

In currencies this month, three are yellow while four are now red. The Japanese Yen is the highest at 0.65; followed by the Swedish krona at 0.34; and the US dollar at 0.16. The weakest currencies are the Canadian Dollar (-1.32; the British Pound (-1.1) and the Chinese Yuan (-1.14) despite the fact that the Yuan will be given reserve currency status in 2016 by the IMF. The last event could have long term bearish implications for the US Dollar.

Click here for a larger image.

Commodities, Real Estate, Debt, Top and Bottom Lists

The next chart shows real estate, debt instruments, commodities and the top and bottom ETFs for the past 100 days.

Commodities are still red and brown with no exceptions. Coal, natural gas, steel, and commodities in general are all below -1.0. The least weak commodity is global water at -0.24. U.S. real estate is still yellow, while Chinese real estate is brown. So many Chinese invested in real estate and thought it could only go up.

Debt was mostly light green two months ago, but now it is mostly yellow. With interest rates now starting to go up, the longest term bonds are now brown. Junk bonds are now red indicating a lack of faith, however, the strongest ETFs in the database are mostly muni bonds.

The top ranking ETFs in the database now show seven ETFs that are dark green — mostly municipal bonds and they dominate the top spots including the light green. None of the ETFs this month are over +2.0 but 13 of the 15 are over +1.0

The bottom ranking list no longer includes any ETFs with SQN scores below -2.0 as compared with four last months. The bottom 15 are all at or below negative 1.4.

Summary

Now let’s look at the summary table which measures the percentage of ETFs in each of the strength categories.

Date	Very Bullish	Bullish	Neutral	Bearish	Very Bearish
2013	> 1.5	0.75 - 1.5	0 - 0.75	0 - -0.7	< - 0.7
Jan 31st,	27.1%	39.6%	20.7%	6.4%	4.7%
Feb 28th	10.3%	45.2%	24.4%	11.9%	7.5%
Mar 31st	39.2%	25.5%	19.1%	9.0%	6.4%
Apr 30th	49.1%	21.1%	14.8%	8.0%	6.2%
May 31st	29,2%	23.6%	19.9%	12.3%	14.2%
Jun 30th	2.1%	31.0%	23.2%	22.0%	20.9%
Jul 31st	8.2%	33.5%	29.0%	13.3%	15.2%
Aug 30th	1%	15%	46.4%	19.3%	17.5%
Sep 30th	1%	13.8%	42.3%	23.0%	19.1%
Nov 1st	13.3%	48.3%	21.8%	12.5%	3.3%
Dec 1st	14.6%	42.7%	24.2%	13.3%	4.3%
Dec 31st	19.3.%	45.5%	22.0%	11.3%	2.9%
2014
Jan 31st	8.0%	49.3%	20.7%	12.7%	7.6%
Feb 28th	18.9%	48.4%	18.1%	6.2%	6.8%
Mar 31st	4.9%	40.2%	38.8%	13.3%	3.1%
Apr 30th	11.1%	33.9%	40.2%	11.3%	1.8%
May 31st	12.5%	46.5%	27.7%	7.6%	6.0%
Jun 30th	53.4%	33.7%	14.2%	2.5%	0.8%
Aug 29th	20.3%	45.2%	22.8%	10.5%	5.3%
Sep 30th	6.6%	26.9%	30.2%	24.0%	18.5%
Oct 31st	2.9%	17.9%	38.8%	17.7%	26.3%
Nov 30th	3.1%	25.7%	25.1%	22.8%	27.9%
Dec 31st	3.7%	29.2%	24.8%	15.6%	31.2%
2015
Jan 31st	7.2%	9.4%	35.1%	25.5%	27.3%
Feb 28th	6.4%	41.1%	34.5%	11.5%	10.9%
Mar 31st	2.3%	24.0%	46.4%	19.7%	12.9%
April 30th	1.6%	13.6%	69.4%	15.0%	5.7%
June 30th	1.4%	15.8%	48.5%	29.0%	10.7%
July 30th	0%	7.2%	49.7%	39.0%	9.4%
Aug 31st	0%	0.4%	7.6%	49.7%	42.3%
Sept 30th	0%	2.7%	7.6%	42.7%	39.8%
Oct 31st	1%	6.0%	19.5%	51.3%	22.2%
Nov 30th	0.8%	3.1%	38.0%	42.1%	16.0%
Dec 31st	1.4%	1.6%	16.8%	56.1%	24.2%

Three months ago 92% of the ETFs we track were either in bear territory or strong bear territory. That number decreased to 58% last month and this month it moved back up to 78.3%. We are in a mild bear market which could get worse. Watch volatility.

Be careful to base your actions upon what is happening, not what you think might happen.

Until the January SQN Report this is Van Tharp.

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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