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May 4, 2005 � Issue #218 | |
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Market Update Market Update for April 30, 2005 1-2-3 Model Still in Red Light Mode By Van K. Tharp
Core Education Helping Traders and Investors with Peak Performance Results for Over 20 Years.
Trading Tip Volatility Returns to the Markets � For Now, By D.R. Barton, Jr.
Listening In... Scared to Take the Next Step...
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Market Update for April 30, 2005 1-2-3 Model Still in Red Light Mode By Part I: Market Commentary. On April 15th I issued a special bulletin because 1) all three major averages were down over 3% on the week. In fact, it was the only the second or third weekly change over 2% for 2005. In addition, 2) all three market averages were below their price five weeks ago. As a result, it was the first clear signal for our bear market mutual fund strategy since Safe Strategies for Financial Freedom was published. However, the market has now resumed its flat, do-nothing state. Over the last two weeks, all three averages are up just about 1%. And remember that is for a two-week period. Basically, nothing seems to have changed. However, this now remains a very dangerous market. And today (May 3rd) the Federal Reserve raised interest rates for the 8th straight time since a red light signal was flashed. The 1-2-3 Stock Market Model IS IN RED LIGHT MODE. BE CAREFUL. What the market is doing. Currently, all three major averages are 1) down for the year and 2) down for the last five weeks. I don�t like this market at all. It�s just being a very subtle bear, making it hard for anyone to take much money out of the market. It�s probably nibbling most of you to financial ruin � but just a few percent each month. However, we could expect some real fireworks once the pension fund money stops moving into the market. We�re now into May and that usually is the first month of the seasonal downturn. Will we go into a major bear market down leg this month? That�s anyone�s guess. But after eight straight interest rate increases and now the seasonal factor being in favor of a down movement, it�s beginning to look that way. The table below shows the five-week status of each of the major markets.
Incidentally, this data is calculated by hand based upon last Friday�s close (i.e., April 29th). There is always a possibility of human error in our numbers. What�s a good strategy for the month? Well, a bear market mutual fund signal was given two weeks ago. And the market is only a little higher now, meaning you�d get a better price. In addition, the market is clearly down for the year and over the last five weeks. However, for many of you, it might be best to stay on the sideline until this market tips its hand a little more. There are very few strategies that are working well right now in this sort of market � a low-volatility, down to sideways market. Part III: Our Four Star Inflation-Deflation Model. In Safe Strategies for Financial Freedom, we argued both sides of the inflation-deflation argument. We established four indicators that would help us track inflation and I�ve been reporting those indicators in Tharp�s Thoughts in the first email of each month. However, I�m not that happy with the four indicators because many of them can be manipulated by the Federal Reserve. Let�s look at the four indicators and what we could use instead. Our current four indicators for inflation are: 1) The CRB index 2) The price of Gold 3) The CPI and 4) The trend in interest rates. My biggest problem with these indicators, which have suggested inflation since we�ve been using the model is that all of the figures (with the exception of the CRB index) can be easily manipulated by the government.. The second problem I have with these four indicators is that you can look at the data and find some sort of trend that might support your conclusion. For example, the deflationary argument above was all based on what has been happening in the markets over the six-week period from March 1st through April 15th. So let�s look at some new indicators that we will be using in the future � indicators that are less likely to be manipulated by the government. 1) The CRB Index. I already said that I believe that the CRB index is the one we have currently that is the least manipulated by the government. But what�s the best way to measure it? For consistency, I plan to give two measurements. � Is the CRB index higher than it was six months ago? If it is, we are on track for inflation. � Is the CRB index higher than it was two months ago? Now there are several ways to monitor these two indices. � If both differences are higher, we�ll count one star for inflation. � If the six-month change is higher, but the two-month change is not, then we will only count � star for inflation. � And if both the two and six month changes are lower, then we�ll be minus one for inflation. � However, if the six-month change is lower, while the two-month change is higher, then we�ll be minus � star for inflation. Obviously, the two minus scores will point to deflation. 2) The Basic Materials Sector ETF (XLB). In an inflationary environment, basic materials will definitely go up. This sector, to the best of my knowledge, is not manipulated by the government. Thus, we will use this sector to monitor inflation and we�ll use the same measurements use for the CRB. (1) Is the XLB higher than it was six months ago; and (2) Is the XLB higher than it was two months ago. These two measurements give us four possible results. � If both differences are higher, we�ll count one star for inflation. � If the six-month change is higher, but the two-month change is not, then we will only count � star for inflation. � And if both the two and six month changes are lower, then we�ll be minus one for inflation. � However, if the six-month change is lower, while the two-month change is higher, then we�ll be minus � star for inflation. Obviously, the two minus scores will point to deflation. 3) The London PM Gold price at the end of each month. Although Gold can be manipulated by the government, I still like to look at monthly gold prices. However, to be consistent, we�ll use the same two measurements that we�ve used for the other indices that we are monitoring. 1) Is the price higher than it was six months ago and 2) is the price higher than it was two months ago. Again, these two measurements give us four possible results. � If both differences are higher, we�ll count one star for inflation. � If the six-month change is higher, but the two-month change is not, then we will only count � star for inflation. � And if both the two and six-month changes are lower, then we�ll be minus one for inflation. � However, if the six-month change is lower, while the two-month change is higher, then we�ll be minus � star for inflation. Obviously, the two minus scores will point to deflation. 4) The Fourth Measurement we�ll use is related to the Financial Sector of the S&P 500. The financial sector (XLF) tends to do well when we have deflation and poorly when we have inflation. Martin Pring, in fact, has used an index in which he divides the XLB by the XLF. Since we already use the XLB, we�ll use the XLF by itself as well. Again, we�ll use the change over six months and over two months. However, the four possible outcomes with give us a different interpretation. � If both differences are higher, we�ll count one star for deflation. � If the six-month change is higher, but the two-month change is not, then we will only count � star for deflation. � And if both the two and six month changes are lower, then we�ll be plus one for inflation. � However, if the six-month change is lower, while the two-month change is higher, then we�ll be plus � star for inflation. Obviously, the two minus scores will point to strong inflation. Okay, so now let�s look at the results for the year. We�ll pretend that April 15th is the end of the month so that we have a current reading.
We�ll now look at the two-month and six-month changes over during 2005, so see what our readings have been.
All four months this year have show some signs of inflation, with our indicator heating up to +4 by the end of March. However, notice the dramatic drop to just +1.5 in April (i.e., it was even more dramatic in the first two weeks of April). It looks like some major changes are taking place in the market � and they are now moving toward deflation. Part IV: Tracking the Dollar. The dollar is now much higher than it was at the start of the year and its gone up every month of the year. The dollar has 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 2005 if you don�t do so last month. Be careful here. Follow the guidelines we set for you in Safe Strategies for Financial Freedom. 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. And that decline could start this month. However, predictions mean nothing. Let�s let the market tell us what will happen. Until the May update on the market�..
Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.
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Recommended
Materials:
Van Tharp's Peak Performance Home Study Course Has been helping traders and investors with break through results for over 20 years. Learn more about this highly effective and unique course for traders and investors...
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Volatility Returns to the Markets � For Now Trading Tip by D. R. Barton, Jr. In absolute terms, the volatility of the markets is at its highest point since July of 2003. In a mere 14 trading days, the market�s volatility (based on the S&P 500 futures), has increased by 44 percent, as measured by Average True Range (ATR). ATR is an indicator that measures the average range of a bar, taking into account the effect of gaps. Daily ATR has jumped to 16.5 points a day on the S&P. This is up from an ATR of just 11.45 points on 4/10 and a level that was below 9 points a day for most of February. What does this spike in volatility mean for traders and investors? There are different implications for different groups of traders. Day traders are dancing in the streets. Okay, maybe just doing little jig next to their computer. Wider daily ranges mean more and better opportunities for intra-day traders. (Editors note: for those interested in day trading, you don�t want to miss the workshop being presented by D.R. Barton and Brad Martin. There are still a few seats left, so for details, go to this link: But while day traders are rejoicing, the current market is presenting some real challenges for swing and position traders. Let�s see why. Van likes to characterize markets as falling into one of six categories:
The markets of the past two weeks have been highly volatile (by recent standards) and moving sideways. This is a rather unusual market condition, and anecdotally, I would hazard a guess that it is the least common of the six market types listed in the table. This is tough market environment for swing traders, because it�s almost impossible to keep a tight stop. Position traders are less affected, but their stops are being hit more readily and one of the most popular trend following entries (the volatility breakout) is giving false triggers. It�s easy to see why: a volatile move is often followed by a continuation in the direction of the volatility (which is why folks use these types of breakouts in the first place). In the recent markets, a volatile up move has been followed by a volatile down move. If your swing and positions system stops are getting hit more often in the last couple of weeks, it may be prudent to either reduce your position size for new trades or strand aside all together. You can most likely resume normal trading when we either break out of this sideways trading range or when volatility drops back below 12 points for a few days as measured by a 14 period ATR on the daily S&P futures chart. As market conditions, such as the current one usually resolve themselves fairly quickly. Look for a volatile break to the upside or downside in the near future that will give us a good indication of the direction that the market should take for the next couple of weeks. Until then, take prudent measures to reduce your exposure if your trading strategies are having difficulty navigating these tough market conditions.
Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution. |
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Excerpts from Dr. Tharp's Mastermind Discussion Forum
Scared to
Take the Next Step...
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