Feature
Tharp�s Thoughts
Market Update for December 2007
1-2-3 Model in Red Light Mode
by
Van K. Tharp, Ph.D.
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 four star
inflation-deflation model, 4) what the US dollar is doing, and 5)
the five strongest and weakest areas of the market.
Part I:
Market Commentary
We�re in for a real ride in the markets
right now. We�ve
already had a 10% correction followed by a bounce.
Is this going to be like July when the market almost
corrected 10% and then went on to make new highs?
Or is this market going into a major downturn?
I don�t know the answer, except that 1) we are in a secular
bear market; 2) we are in a dollar crash; 3) we have a tremendous
subprime crisis; 4) real inflation is over 10% and 5) we�re
probably in (or close to) a recession even by the government�s
standards. They�ll
probably tell us about it in a few months.
So let�s look at what the market did in
November.
Part II: The 1-2-3 Stock Market Model Is
Really Borderline but Officially in RED Light Mode.
(I�ll explain why in a minute.
Stocks tend to go down 9% per year in red light mode.)
The 1-2-3 Model is in borderline mode between
yellow and red.
The Fed is not in the way and has actually started to lower
interest rates. That�s
positive. However the
other two indicators seem to vacillate between positive and negative.
The market has had a 10% correction and then recovered.
It�s flirting with the moving average, but it�s
officially below it. However,
that tends to lower the PE ratio of the S&P 500 to near 17,
which Steve Sjuggerud considers to be positive.
Also, you only get an official reading of the S&P 500 PE
ratio every quarter and its usually long after the quarter has
ended. Based on the
latest readings, the PE is 17.1, so it�s officially expensive.
I personally would call the market very borderline.
Both of these could move slightly and we�d be in green
light mode, so it�s a very mixed bag right now.
Just remember we�re in a secular BEAR market.
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.
These data are given in Table 1.
Table
1: Stock Performance
Over the Last Month |
|
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 |
+3.07% |
1645.2 |
1.50% |
Close 06 |
12,463.15 |
16.29% |
1,418.30 |
13.62% |
1,756.90 |
6.79% |
10/26/2007
|
13806.7 |
|
1535.28 |
|
2194.59 |
|
11/2/2007
|
13595.1 |
-1.53% |
1509.65 |
-1.67% |
2213.86 |
0.88% |
11/9/2007
|
13042.74 |
-4.06% |
1453.7 |
-3.71% |
2034.3 |
-8.11% |
11/16/2007
|
13176.79 |
1.03% |
1458.74 |
0.35% |
2048.62 |
0.70% |
11/23/2007
|
12980.88 |
-1.49% |
1440.7 |
-1.24% |
2028.9 |
-0.96% |
11/30/2007
|
13371.72 |
3.01% |
1481.14 |
2.81% |
2089.1 |
2.97% |
Year to Date |
|
4.65% |
|
2.50% |
|
15.79% |
All three averages are still up on the year,
but the DOW 30 and the S&P 500 are only up a small amount
� less than the market decrease over the week of November 9th.
Strongest
and Weakest Components of the Market
I am starting a new feature here, listing the five strongest
and the five weakest components in the market at the time of this
update. These can change
daily, but the information will be accurate as of the publication of
this update. Table 2
shows the five strongest components this month as compared with last
month.
Table 2:
Strongest and Weakest Market Component
|
Five Strongest Components
|
Market |
Nov Strength |
Market |
Oct Strength |
India |
87 |
Oil |
95 |
China |
71 |
India |
73 |
LT
Treasuries |
66 |
Commodities |
66 |
Hong Kong
|
66 |
Brazil |
66 |
Spain |
60 |
Gold |
65 |
Five Weakest Components
|
Sweden |
21 |
Real Estate |
7 |
Canada |
22 |
US Sm Cap Value |
12 |
Taiwan |
25 |
Mexico |
15 |
Real
Estate |
25 |
US Sm Cap Blend |
16 |
S. Korea |
28 |
Sweden |
16 |
Perhaps you can begin to understand why the
Japanese are starting to focus their assets on emerging markets
instead of the U.S. Also
notice how some of the strongest markets can drop dramatically.
Oil is now 38 and commodities are now 50 after being in the
top five at the end of October.
This is because short term swings have a lot more play in the
rating scale than long term swings.
By the way, this information is for educational purposes only,
so you can understand the big picture and its importance.
Incidentally, some of you have asked how all
of this is calculated and other details.
This is pretty similar to Ken Long�s world model, which he
covers in detail, including calculations, in our ETF workshop.
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. Inflation is
obvious, but simply masked by government statistics.
Okay, so now let�s look at the results for the last six
months. And remember
that the Fed has now chosen to produce inflation and a strong dollar
devaluation over the pain of the subprime crisis.
Date
|
CRB
|
XLB
|
Gold
|
XLF
|
Dec-05
|
347.89
|
30.28
|
513
|
31.67
|
Dec-06
|
394.89
|
34.84
|
635.5
|
36.74
|
May-07
|
407.58
|
40.72
|
659.1
|
37.69
|
Jun-07
|
410.36
|
40.5
|
650.5
|
36.18
|
Jul-07
|
424.52
|
39.42
|
665.5
|
32.9
|
Aug-07
|
413.49
|
39.15
|
672
|
33.75
|
Sep-07
|
447.57
|
42.11
|
743
|
34.32
|
Oct-07
|
453.26
|
43.86
|
789.5
|
33.73
|
Nov
07
|
451.26
|
41.65
|
783.50
|
31.00
|
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
|
October
|
Higher
|
Higher
|
Lower
|
Higher
|
Higher
|
Higher
|
Lower
|
Lower
|
|
|
|
+1
|
|
+1/2
|
|
+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 for more information on the model.
Both
Gold and Commodities fell over the last month, but I suspect this
was due to the subprime crisis starting to liquidate their holdings.
Gold stocks, for example, took huge hits (much more than
gold).
Last
month I mentioned John Williams' web site, www.shadowstats.com. John Williams looks at the real statistics the government
doesn�t want you to know about.
For example, the CPI (if calculated the way it was in 1990)
currently suggests that inflation is running over 10% per year.
And M3 (which the government stopped publishing because they
said no one looks at the data) suggests that inflation might be as
high as 14%. I suspect
that 14% is probably more accurate because even the government�s
old way of looking at the CPI was not particularly accurate.
However, the data clearly suggests that we�re in an
inflationary bear market in which the stock market is not even
keeping up with real inflation (much less the decline in the dollar
as discussed below). In
such a market we could easily see a DOW of 20,000, but that would
probably be worth about 5,000 in today�s market (plus the dollar
could easily have lost real value versus other currencies as
indicated below).
Part IV: Tracking the Dollar
With the Federal Reserve lowering interest
rates, I would now expect currency traders to start selling the
dollar and moving to currencies that pay a better interest rate.
Look at the data in the chart because it really says it all.
Month
|
Dollar
Index
|
Jan
05
|
81.06
|
Jan
06
|
84.29
|
Jan
07
|
82.37
|
Feb
07
|
82.07
|
Mar
07
|
81.23
|
Apr
07
|
79.87
|
May
07
|
79.20
|
Jun
07
|
78.93
|
July
07
|
77.51
|
Aug
07
|
77.51
|
Sep
07
|
75.91
|
Oct
07
|
73.93
|
Nov
07
|
72.20
|
When last month�s issue was written in
early November, the dollar was just under 73.
The dollar is still in a plunge, and I wouldn�t be surprised
to see oil valued in Euros at some time in the future.
The dollar�s status as the world�s reserve currency will
be very much in doubt in the near future.
But the problem is that there is not really a sound currency to
take its place. So what
would take its place? Gold?
And remember that
crisis always implies that an opportunity exists somewhere.
Below you'll see a near-term perspective on a possible opportunity in D.R.'s tip. He believes that opportunity lies in the dollar itself. I'm a trend follower...while D.R. likes to pick stretch points near tops and bottoms with bands (and other tools like sentiment analysis).
I'm a long- term player (and I still think the dollar could go a long ways
down long term) and DR is a short- term player (he�s looking for the dollar to have a temporary reaction up... in the long term
downtrend).
We're not here to give recommendations, just to show you the facts as we perceive them, so that you can make an informed decision based on your own belief system and what fits you.
Until next month�s 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 Freedom 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.
|