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Feature
Market Update for August 8, 2007
1-2-3 Model in Yellow Light Mode
by Dr. Van K. Tharp
Look for these monthly updates in the first issue of each month. This allows us to get the closing month�s 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 new four star inflation-deflation model; and we�ll be 4) tracking the dollar.
Part I: Market Commentary
Last month I issued a special warning about the subprime debt and the effect it is having on U.S. (and worldwide) markets. Yes, in London, big funds are in trouble because of their exposure to subprime debt and the same is true of Australia and probably other countries. This could be the start of a real mess, and it is occurring in a secular bear market.
Last week I actually got a call from one of the major financial media wanting me to comment on the psychology of the market. I declined to do so because I�m not sure that they would have appreciated what I would have said. Furthermore, I�m sure they wanted to know what I thought about the markets for the future. And when the media starts asking a �trading coach� for opinions about the market, we are really in trouble.
I would have told them that we haven�t even had a 10% correction and you are asking about the psychology of the markets. What does that tell you by itself? In addition, the psychology of the markets is not that important. What is important is YOUR PSYCHOLOGY. There are always ways to profit, no matter what the market is doing. Just be sure that you have your stops in place, that your position sizing is optimal for your objectives, and that you have the discipline to follow your rules. If you cannot follow these criteria, then you do not belong in the market.
So what has the market done since I commented on the subprime crisis?
Part II: The 1-2-3 Stock Market Model Is in YELLOW LIGHT MODE and that�s Good for Stocks
We�ve been in yellow light mode since December 29th. The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.
Let�s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year. This is given in the table below.
| 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 | 1211.12 | 1621.12 | |||
| Close 05 | 10,717.50 | -0.60% | 1248.29 | -3.10% | 1645.2 | 1.50% |
| Close 06 | 12,463.15 | 16.29% | 1,418.30 | 13.62% | 1,756.90 | 6.79% |
| 6-Jul-07 | 13,611.68 | 1,530.44 | 1,988.31 | |||
| 13-Jul-07 | 13,907.25 | 2.17% | 1,552.50 | 1.44% | 2,032.16 | 2.21% |
| 20-Jul-07 | 13,851.08 | -0.40% | 1,534.10 | -1.19% | 2,035.88 | 0.18% |
| 27-Jul-07 | 13,265.47 | -4.23% | 1,458.95 | -4.90% | 1,956.19 | -3.91% |
| 3-Aug-07 | 13,181.91 | -0.63% | 1,450.92 | -0.55% | 1,918.56 | -1.92% |
| Yr to Date | 5.45% | 2.25% | 8.43% | |||
Since mid-July, the market, as measured by the S&P 500, has gone down nearly 6.5% (not a 10% correction though) and is only up by a little over 2% on the year. This does not include changes of the week of August 6th, including the huge gain on Monday. The market averages overall have definitely broken trendlines, and we might expect some huge declines on the downside. However, only the market itself can tell us what it is really going to do.
Part III: Our Four Star Inflation-Deflation Model
As I�ve stated many times in these monthly updates, we are in an inflationary bear market. The bear market is not necessarily reflected in prices but in PE ratios. PE ratios will continue in a downtrend even though the Dow is making new highs. The inflation is obvious but simply masked by government statistics. Okay, so now let�s look at the results for the last six months.
| Date | CRB | XLB | Gold | XLF |
| December-05 | 347.89 | 30.28 | 513 | 31.67 |
| December-06 | 394.89 | 34.84 | 635.5 | 36.74 |
| January-07 | 393.89 | 36.25 | 650.5 | 37.08 |
| February-07 | 410.64 | 37.45 | 664.2 | 35.95 |
| March-07 | 407.45 | 37.95 | 661.75 | 37.57 |
| April-07 | 403.54 | 38.62 | 677 | 37.01 |
| May-07 | 407.58 | 40.72 | 659.1 | 37.69 |
| June-07 | 410.36 | 40.5 | 650.5 | 36.18 |
| July-07 | 424.52 | 39.42 | 665.5 | 32.9 |
We�ll now look at the two-month and six-month changes during the last six months to see what our readings have been.
| Date | CRB2 | CRB6 | XLB2 | XLB6 | Gold2 | Gold6 | XLF2 | XLF6 | Total Score |
| July | Higher | Higher | Lower | Higher | Higher | Higher | Lower | Lower | |
| +1 | +0.5 | +1 | +1 | +3.5 |
The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom. The model once again shows that inflation is winning slightly. Click here to see the model explained.
In the May report I said the Federal Reserve stopped the M3 statistic, claiming that it wasn�t useful. But it shows how much money the Federal Reserve is really printing. And current estimates for that figure run at 13% annually.
There is a huge inflation underlying what is going on. It hasn�t been reflected in the price of gold because the European banks have been selling gold to keep the price down and make the markets look more stable. However, they announced on June 1st that they would not sell any more until September. And gold now is moving higher. In addition, the total score is at 3.5, which is the highest we�ve seen since I�ve been tracking this model.
Part IV: Tracking the Dollar
The dollar hit a multi-year low against the pound when I was in London. The dollar, in my opinion, looks really weak and could now fall substantially. The data in the chart really says it all.
| Month | Dollar Index |
| Jan-05 | 81.06 |
| Jan-06 | 84.29 |
| Feb-06 | 85.05 |
| Mar-06 | 85.01 |
| Apr-06 | 83.88 |
| May-06 | 80.63 |
| Jun-06 | 81.51 |
| Jul-06 | 81.94 |
| Aug-06 | 81.18 |
| Sep-06 | 81.59 |
| Oct-06 | 82.36 |
| Nov-06 | 81.49 |
| Dec-06 | 80.89 |
| Jan-07 | 82.37 |
| Feb 07 | 82.07 |
| Mar-07 | 81.23 |
| Apr-07 | 79.87 |
| May-07 | 79.2 |
| Jun-07 | 78.93 |
| Jul-07 | 77.5 |
The dollar has fallen every month since the January close. During that time it fell 5.9%; that is real money that you�ve lost on a worldwide basis. So you think the stock market is up on the year? Not with respect to the fall in the dollar it isn�t.
Until the September update, this is Van Tharp.
About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom 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 www.iitm.com.
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Blue Roses and Perfectionism
by D.R. Barton, Jr.
"Idealist: One who, on noticing that a rose smells better than a cabbage, concludes that it will also make better
soup.�
-- Henry Louis Mencken
If you give roses to that special someone, chances are they won�t be blue.
And if the roses ARE blue, chances are 100% that they were dyed that color.
Roses lack the gene that produces blue plant pigment. And so a �blue rose� has literally been the �holy grail� of horticulture and literary references to this mythological plant abound.
Too often, traders and investors go about searching for �blue roses� � that seemingly unattainable perfect system or the perfect stock that will be the next Microsoft. Too often, we become obsessed with finding something that is perfect instead of finding something that is excellent. When we require perfection, we always find a way to put off action. And this lack of action undermines many good traders and investors.
But there is good news: overcoming perfectionism is possible! Let�s look at how to add purposeful action to your list of trading and investing tools. But first back to that blue rose for a minute�
Blue Roses � Reality Trumps Myth
I saw an actual picture of a blue rose in The Economist magazine earlier this year. So for all of the talk through the centuries about blue roses, genetic engineering has finally struck a blow for modern science. Less than two years ago, researches inserted a cloned petunia gene into a rose plant and after some other fancy maneuvers created what is basically a blue rose.
But don�t run out to the florist looking for any just yet. The process is not commercialized and won�t be before 2010. My guess is that your loved one will not want to wait that long to get some flowers�
Inside the huge flower industry, cut roses by themselves are a 10 billion dollar per year business. So if there�s any way to move that date up, you can bet they will.
There�s good news in all this: botanical researchers have overcome a seemingly insurmountable task. And the perfectionist can too.
Finding Your Own Blue Rose
Perhaps you�ve been looking for the system that�s right 95% of the time and has winning trades that are 10 times bigger than the losers� (If you find that one, please give me a call!)
Even if you are looking for that �blue rose� � the trading system that doesn�t exist � you can still overcome perfectionism by following some simple steps:
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Understand that an acceptable number of losing trades is just part of doing business. No one WANTS to have losing trades. And no one running a company wants to have any expenses. But both are necessary parts of doing business. Perfectionists can overcome their �avoidance of losses� by reframing losses as simple business expenses. Then they�re not something to be avoided, just minimized. Here�s a starting point: if your winning trades are the same size as your losing trades, you need to have at least 55% to break even after slippage and commissions.
-
Remember that all systems have trade-offs. In complex systems like the financial markets, it�s tough to get something without giving up something else in another area. For example, if you make changes to increase a system�s winning percentage, you usually get lower results somewhere else. Either the system will trade less frequently or the average size of the winners will be reduced. Learn what�s most valuable to you and design your strategies to fit your trading personality. Some people require more frequent wins, while some want bigger winners.
-
Train yourself to act even when conditions aren�t perfect. Postponing action is one of the easiest things for a perfectionist to do. Many system designers end up never making a trade because they can�t make things perfect. Realize that complex systems (like the markets) will always have some ambiguity and plenty of uncertainty. We build systems with rule sets, so we take action even when such uncertainty exists. Substitute the phrase �highly probable� for those times when you need a �sure thing,� and you�ll find that taking action is much easier.
Trading systems and strategies don�t need to be perfect; they just need to give us an edge in the markets. When you�re looking for a strategy to use, don�t wait for a �blue rose� to show up. There are lots of great red (and white) ones out there that still smell as sweet.
Great Trading!
D. R.
About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.
He is a regularly featured guest analyst on both Report on Business TV, and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine.
What's Love Got to Do with It?
Self-Work Series Part III
by Melita Hunt
"....most of us actually find it much more difficult to accept love than to give it. We often do not even recognize love when it is given, and if we do, we fear it. The fear that it will be snatched away the moment we accept it. We spend our lives protecting ourselves from being loved."
- Indian film maker and
astrophysicist, Shekhar Kapur
As part of my series on self-work, I am endeavoring to bring up areas in our lives that we may not actively pay much attention to. And in the context of trading, what�s love got to do with it anyway?
Well, I have a belief that most people who are actively pursuing a successful trading career are doing it for one of the following three reasons: wealth, security or achievement, but deep down (whether we consciously recognize it or not) this search is really to experience ways of �being� such as love, happiness, freedom or peace of mind. So what if we experience these states daily? Would our trading improve as a result rather than the other way around (i.e., instead of looking for these things through trading, would our trading improve because of how we are �being�)?
And, how do we create love, happiness, freedom and peace of mind?
First, let�s look at love. Who do you love most in the world? Is it your spouse? Is it your children? A family member? A pet? A lost love? An unrequited love? Or perhaps yourself? Does the question fall flat or does it stir up any type of emotion or thought? Does it touch on your spiritual buttons and beliefs because I didn�t mention faith? Right now, I am not going to dig that deep, instead I want to keep it reasonably light and look at what makes you, as a person, feel loved. And how do the others in your life feel loved? Have you ever asked them?
And how do you give yourself love? Actually, do you give yourself love?
One book that I really enjoyed, and that I experienced an �aha� moment while reading is The Five Love Languages, by veteran marriage counselor Gary Chapman (he has a generic, men�s, children�s and teen's version of the book). He has identified that we speak different �languages� of love and subsequently give and receive love in these ways. The following is pulled directly from a customer review on Amazon because it gives the gist of the book (and why re-write what�s written?).
�How's your relationship with your mate? Your children? Your parents? Your siblings? It may be a matter of the state of the "love tank". Author Gary Chapman believes everyone has a love tank, and that tank is filled by different love languages. These five languages are Gifts, Words of Affirmation, Quality of Time, Acts of Service, and Physical Touch.
�This would be why a husband who does yard work, dishes, car maintenance, etc. (Acts of Service) is floored when his wife says "You never show me you love me. You never cuddle with me, or caress my hair, or make the first move for sex." (Physical Touch). Or, "Why don't you spend time with me? Why do you work so much?" (Quality Time). And, "Why don't you buy me flowers? Why don't you ever get me cards or balloons?" (Gifts) Or "You never tell me what I mean to you. Why don't you ever share with me what I mean to you, or what my good qualities are?" (Words of Affirmation) But, if her language is primarily Acts of Service (like the husband), she'll feel so loved and honored because her husband does so many things for her.
�This may not sound like a big deal, but considering the divorce rate is 50% and so many seem to be unhappy with their primary relationships, the concept of love languages may very well be a significant factor in understanding self and others, and in relationship growth.�
So Chapman says that we have a desire to be loved in a certain way; but this does not necessarily mean that this is the best way to show love to others.
And he says that you can tell a person�s love language by how they show love to others. So observe yourself and those closest to you.
I found this book interesting because it made me stop and really think about what love was to me. How did I recognize it? How did I show it? Did I think that I was being loving (by �doing� certain things) when I was in fact trying to satisfy my own love needs? How had others shown love to me that I hadn�t acknowledged? Do you see how this can set us up for miscommunications and actually feeling �unloved�?
There is a great test in the men�s version of the book, or you can check out the website www.fivelovelanguages.com for free, and have some fun with it. When I tested myself, I scored high on quality time and physical touch but acts of service didn�t even rank with me. So you could wash my car, clean my house or even become a trader who creates phenomenal wealth for the family, but none of it would register as �love� to me if you weren�t giving me some of your undivided attention and a cuddle too.
My mother is clearly an acts of service person (and quality time), whereas my father was a gifts person. So it was fascinating to look back at my childhood and recognize where they were showing love and how I did or didn�t �get it.� And the thoughts that I had when I didn�t �get it� could have stirred feelings and beliefs of not being loved, or being unlovable (which is certainly not the truth) and these beliefs perpetuated certain behaviors and actions. Is the sequence making sense?
As always, self-work is just awareness and recognizing things about ourselves so that we can continue to grow as a person.
Today I�ve only scratched the surface of this thing called love. It is a huge subject that digs down to an amazing number of levels and I have thoroughly enjoyed the journey of discovery over the years. But for right now, I hope that you are at least actively thinking about love in your life and how you express love in the world. Is it something that emanates from you every day, or is it something that is long forgotten and suppressed? Either way, what�s next for you in the area of love in your life?
My suggestion for anyone reading this is to take some time to give love to yourself, be willing to ask for love from others in a way that works for you, and show love to others in a way that works for them. And, see if your trading changes as a result. Who knows, you might just feel happier.
I don�t know if love makes the world go around, but I believe that there is an unlimited supply within all of us, and that is a very useful belief for me to have.
So back to something I said earlier: how do we create love, happiness, freedom and peace of mind?
Well, we don�t actually need to create love.
It already exists within us.
It�s a state of being.
We simply love.
Some Ongoing Suggestions:
The Five Love Languages: How to Express Heartfelt Commitment to Your Mate
by Gary Chapman
The Five Love Languages: How to Express Heartfelt Commitment to Your Mate (Men's Edition)
by Gary Chapman
You can contact Melita at [email protected]
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