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#884 April 4, 2018

Tharp's Thoughts

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Feature: March Market Update - Neutral Volatile Market Type, by Van K. Tharp, Ph.D.
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Tips: March SQN Report, by Van K. Tharp, Ph.D.
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Feature Article

March Market Update - Neutral Volatile Market Type

by Van K. Tharp, Ph.D.

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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. However, if your beliefs are not similar to mine, then this information may not be useful to you. 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 market was in Bull Quiet for many months until recently. Now it’s moving sideways and it's volatile. What was working a few months ago (buy and hold) will not work anymore. This Neutral Volatile market type could continue for a while or it could change to a different market type soon. Our market type classification system is descriptive of today’s conditions, not predictive of tomorrow's. It’s like a trend. You know the direction, but you don’t know whether it will continue.

US Debt Clock

The US National Debt finally surpassed $21 trillion – I remember when I thought a trillion was awful. Federal spending is now listed at over $4 trillion for the last seven months.

Currently there are 121.2 million taxpayers supporting 103.25 million other people. Here I’m counting retirees, disabled, and food stamp recipients, however, the US debt clock site lists 165.9 million people receiving some sort of benefit. I had to start taking social security last year so I guess I’m one of them. Between the tax on my social security and the contributions I still make, however, I actually receive only 1/3 of my benefit while 2/3rds of it goes back to the government.

Part II: The Current Stock Market Type Is Neutral Volatile

The market was Bull Quiet or Strong Bull Quiet for most of 2017. At the end of 2017, the Market SQN scores for all four periods I monitor (200, 100, 50 and 25 days) were in Strong Bull. Two months ago the Market SQN score on the S&P 500 for 100 days was 3.43 – as high as I’ve seen it. Perhaps that was a sign that it was bound to come down. At the end of February, it came down to 0.78 – almost Neutral – and this month, it is 0.35 which is Neutral. Pay attention to what the market is doing, not to what you think it might do.

This month the Market SQN score for 200 days is still bullish but the 50 and 25 day scores are now in Bear. In my opinion, going from Strong Bull Quiet to Neutral Volatile (almost Bear Volatile) in two months is almost unheard of. That’s not supposed to happen but it did.

The first graph shows the S&P 500 weekly bars over the last year so it is easy to see bull market type last year. Look at the size of the bars now, however, compared with a few months ago. They are huge compared to what we had in 2017.

In January, the S&P 500 had 14 new all-time highs. In Feb there were none. The last all-time high is now 44 days ago.

Here is the market type graph. It changed from a very Strong Bull in just a few weeks to Neutral. Since mid February, it has jumped back and forth from Bull to Neutral and is now in low Neutral territory.

Two months ago I commented: “this volatility is so quiet that I had to change the axis to go below 0.5 in order to show the line (at 0.41). This is not the climate out of which bear markets arrive.” The graph above, however, shows the new volatility in the market zooming through the Normal range in February and reaching Volatile very quickly. It moved back to Normal but is now back up again in Volatile. If it stays there, then we could begin to worry about this market.

Right now the future direction for this market is anybody’s guess. It's highly likely that buy and hold stops (i.e., 25% trailing stops) have been hit. If you haven’t been stopped out, it’s now time to think if your trading strategies will work in a sideways market type or in a bear market.

The table below shows the weekly changes in the three major stock indices over the last month.

After huge gains in 2017, the Dow 30 and the S&P 500 at the end of March are actually down for the new year.

Part III: Our Four-Star Inflation-Deflation Model

Commodities, basic materials, and gold are all up over the last six months which produced another inflationary model score for March. See the historical numbers for previous years and the monthly figures for the last year below.

Our model showed signs of inflation for the past 8 months with a sudden dip down into deflation in February but now it’s back into inflation. I took a look at the shadowstat.com data and noticed that based upon how the CPI was calculated in 1980, inflation still shows close to a 10% rate. According to shadowstats.com (which also calculates real inflation adjusted GDP data), we’ve been in a recession since 2000 – 17.5 years.

Part IV: Tracking the Dollar

The US Dollar more or less went down throughout all of 2017 but it has been pretty flat for most of 2018. It actually held its own against the Australian Dollar while I was in Australia last month so perhaps I need to give up on the Tharp Phenomenon. The USD hasn’t collapsed lately when I have been outside the US.

from www.marketwatch.com

Conclusion

We’ve gone from Strong Bull Quiet to Neutral Volatile in just two months. That’s quite a change and one we have seldom seen, if ever. But what does it mean?

There’s no more of a prediction in the current market type than there was in the Bull Quiet market type two months ago. You need to pay attention to what the market is doing right now.

Two months ago, a buy and hold strategy worked well (i.e., have a 25% trailing stop). But now the market type is clearly different and if you have not been stopped out, then you should make sure that your trading/investment strategies can tolerate a sideways (perhaps soon to be bear) market.

I monitor market type because it helps traders understand which kind of trading systems they should be using right now. You would not have done too well in March with bull quiet systems but trading systems that take advantage of volatility would have done fine.

Rather than trying to predict what the market will do next 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 perform acceptably well in one or two other market types also.)

Look at the market type. What’s the market doing right now? It’s sideways and it’s volatile. The bull could resume but a quick transition to bear is equally possible now.

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.

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Trading Tip

March 2018 System Quality Number^® Report

The SQN^® Report

by Van K. Tharp, Ph.D.

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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 still a weak currency and since the world model is totally valued in the US Dollar, everything should be increasing relative to it.

Overall, the US market segments looked amazing two months ago, not so good last month, and pretty neutral this month. At the end of January, the Dow had a Market SQN score of 4.5 and the S&P 500 was at 3.62 – both extremely high. But when they reach that high, it could mean oversold time. At the end of March, the DOW’s Market SQN score is now at 0.39 and the S&P 500 score is 0.35. Big changes and both are now yellow.

The other Americas markets are brown (Canada), yellow (Mexico and Chile) while Brazil, and Latin America are light green. Emerging markets are also yellow.

Asia is mostly yellow but weaker than last month. Malaysia is dark green (2.2) while Thailand is light green(1.37). India and Australia are brown and everything else is yellow.

Europe also became weaker in March. There are no green countries at all now and four are brown - Germany (-0.34), Spain (-0.15), Sweden (-0.40), and Switzerland (-0.02). All the rest are yellow.

On the currencies side we have a lot of green including the British Pound (1.47), the Euro (1.15), the Yen (1.39); the Swiss Franc (0.84), and the Chinese Yuan (1.22). That means USD is still weaker than all the other major currencies. Not a good climate in which to have a down stock market. Bitcoin is now neutral as well. It had a 69% drop followed by a 50% recovery and then another smaller drop. The weakest currencies in the model are the Aussie Dollar (where I was in March), the Canadian Dollar, and the Swedish Krona. They are all brown while the US Dollar is red.

Two months back, we had numerous US stock market sectors with Market SQN scores over 3.0. Not this month. No sectors in March were dark green but some were light green. The light green sectors include Consumer Discretionary (1.13), Retail (0.86), Aerospace (0.75), Broker Dealers (1.02), Gaming (0.87), Media (0.92), Networking (1.19) and Volatility (.85). There are now some brown sectors include Basic Materials (-0.16), Pharmaceuticals (-0.07), REITS (-0.54), Utilities (-0.69) and Telecom (-0.47). Everything is yellow.

Commodities, Real Estate, Debt, and the Top and Bottom Lists

Commodities are mixed again. Oil and Timber are light green but nothing else is strong. Five commodity sectors are yellow. Silver (-0.40), Base Metals (-0.38), Natural Gas (-0.17), Global Water (-0.13) and Agriculture (-0.55) are all brown. Livestock is red.

Interest rate based products still look terrible and there are no exceptions this month. Junk, 20 year + bonds, and TIPS are brown and all the rest are red.

Real estate across the board is neutral with the US being a little stronger than China.

Looking at the strongest ETFs list, we have only two that are above 2.0 which is the same as last month. Those are Malaysia and Emerging Latin America. And while last month the strongest 15 were all dark green, this month only 8 of the 15 are dark green. The rest are light green.

The weakest areas are all red. The worst is Livestock but most of the weak list ETFs are interest rate based funds.

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 -

We’ve moved from 45.6% of our ETFs being strong bull two months ago to 1.6% this month. And we’ve moved from 13.3% of our ETFs being neutral two months ago to 48.5% this month. We’re in a correction and that could be temporary before we resume a bull market or before we move into a bear market.

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.

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