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Feature
 Tharp�s
Thoughts
Market
Update for April 2008
Market
Condition: Volatile Sideways
by
Van K. Tharp
�
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 just point
out that these updates reflect my beliefs. If my beliefs and your beliefs are not the same, then you
may not find them useful. I do
find the market update information useful for my trading, so I do
the work each month and I'm happy to share that information with my
readers.
However, if your beliefs are not similar to mine, then
the 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 condition (mentioned in the April 30 edition of
Tharp�s Thoughts), 2) the five week status on each of the major stock U.S. stock market indices, 3) our four star inflation-deflation model, 4) tracking
the dollar, and 5) the five strongest and weakest areas of the overall market.
Part I: Market Commentary
One of the most interesting books I�ve come across lately is called
The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free by Ellen Brown, JD. Here are two quotes from the back cover (notice the dates) to give you a flavor of the book:
�The sack of the United States by the Fed is the greatest crime in history. Every effort has been made by the Fed to conceal its powers, but the truth is the Fed has usurped the government.� -- Charles McFadden, Chairman, House Banking and Currency Committee, 1932.
�The real truth is
... that a financial element in the large centers has owned the Government ever since the days of Andrew Jackson� -- President Franklin D. Roosevelt, 1932.
The
book proposes that big money interests supported the Civil War because it was a chance to drive the United States apart, with both sides in heavy debt. And that was the chance to take control over the country. They considered physical slavery to be obsolete because the slave owners were responsible for the physical care of the slaves. However, debt slavery of a nation is much more efficient because it involves most of the nation and there is no need to care for the slaves. In fact, under ideal conditions the slaves can even prosper.
In addition, according to Brown, even our political process was created by huge money interests so that people would be distracted over politicians who quarreled over issues that were insignificant to what the �debt slave owners� were doing. I think that�s particularly evident this
year; that this country is in severe financial difficulties that are hardly mentioned by those running for president.
I think
this book is very important reading for anyone who wants to stay on top of the big picture. In addition, I think there is a chance that the whole system might undo itself in the next few years. Overall, that would be great for the United States, but the short term ramifications would turn everything upside down since we�ve come to depend upon the system put in place.
Part II: The Current Stock Market Type
Is Volatile Sideways
I have now substituted my new market type for the 1-2-3
model, because as soon as the 1-2-3 model goes below a certain PE ratio (which it is poised to do), another component will turn bullish. However, I expect us to be in a secular bear market until the PE ratios of the S&P 500 reach single digits. Thus, the 1-2-3
model doesn�t really fit my current beliefs.
In last week�s issue of
Tharp�s Thoughts, I showed you how I measured the market type on
a weekly basis, based upon a rolling 13-week window. The table below shows the market type since the first of the year. The dates given
are the Monday after the close of the week as that�s when Yahoo (our data source) gives out weekly changes.
| Volatile
Sideways |
5/5/2008 |
| Volatile
Bull |
4/28/2008 |
| Volatile
Sideways |
4/21/2008 |
| Volatile
Sideways |
4/14/2008 |
| Volatile
Sideways |
4/7/2008 |
| Volatile
Sideways |
3/31/2008 |
| Quiet
Bear |
3/24/2008 |
| Volatile
Bear |
3/17/2008 |
| Volatile
Bear |
3/10/2008 |
| Volatile
Bear |
3/3/2008 |
| Volatile
Bear |
2/25/2008 |
| Volatile
Bear |
2/19/2008 |
| Volatile
Bear |
2/11/2008 |
| Volatile
Bear |
2/4/2008 |
| Volatile
Sideways |
1/28/2008 |
| Volatile
Bear |
1/22/2008 |
| Volatile
Bear |
1/14/2008 |
| Volatile
Bear |
1/7/2008 |
| Volatile
Bear |
12/31/2007 |
You�ll notice that only one week this year has been classified as quiet, the week ending March 24. Generally 2008 has been a year of extreme movements. It�s also been generally bearish, although the sideways period has had a general up inclination to it.
One person suggested that we could classify markets as being quiet when they are really volatile by not using the average true range of the days of the week as our measure of volatility. For example, it�s quite possible to have a week with the following days: 1) Up 5% on Monday, 2) Down 5% on Tuesday, 3) Up and down 5% on Wednesday with a net close of zero, 4) down 4% on Thursday, and 5) up 4% on Friday. This would result in a zero change for the week and a quiet classification, while the entire week was tremendously volatile. However, that does not seem to occur very often because the entire year of 2008 has been volatile by our measures with the exception of the week of 3/24.
I tend to consider one week changes to be abnormalities. Thus, it looks like we�ve had a volatile bear market from
the week ending 12/31 through the week ending 3/24. We have had a volatile sideways market (although with a slight uptrend) since 3/24.
Incidentally, I looked at the week ending
3/24 and there is no way that you could label that week as being volatile. Nevertheless, I will look at
how much our classification changes if we were to use the ATR of the daily ranges to measure volatility.
|
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 |
|
1,211.12 |
|
1,621.12 |
|
| Close 05 |
10,717.50 |
-0.60% |
1,248.29 |
-3.10% |
1,645.20 |
1.50% |
| Close 06 |
12,463.15 |
16.29% |
1,418.30 |
13.62% |
1,756.90 |
6.79% |
| Close 07 |
13,264.82 |
6.43% |
1,468.36 |
3.53% |
2,084.93 |
18.67% |
| 4-Apr-08 |
12,609.42 |
|
1,369.31 |
|
1,865.87 |
|
| 11-Apr-08 |
12,325.42 |
-2.25% |
1,360.55 |
-0.64% |
1,798.72 |
-3.60% |
| 18-Apr-08 |
12,849.36 |
4.25% |
1,365.56 |
0.37% |
1,900.28 |
5.65% |
| 25-Apr-08 |
12,891.86 |
0.33% |
1,388.82 |
1.70% |
1,918.58 |
0.96% |
| 2-May-08 |
13,058.20 |
1.29% |
1,409.34 |
1.48% |
1,981.87 |
3.30% |
| Year to Date |
13,058.20 |
-1.58% |
1,409.34 |
-4.19% |
1,981.87 |
-5.20% |
The last
three weeks have all been up weeks, but the market is still down on
the year. Last month we
were below the 2006 close and we�re now above that in the Dow and
NASDAQ.
I�m also
listing the strongest and weakest areas of the market in this
update. The ratings give the most weight to what has happened
recently so they can sometimes change rapidly.
In addition, I have trouble listing an area as being strong
when it is actually down in price over the last 40 weeks.
Thus, I plan to only list the strongest areas that are also
up over the last 40 weeks. The
relative strength of each component is given in parenthesis.
Part
III: The Strongest and Weakest
Market Components
Five
strongest components, in order:
1)
Brazil (87) -
This giant from last year has resumed its uptrend, which is
interesting because it was very weak last month.
2)
China (72) -
Another giant is resuming its uptrend.
It�s higher than it was 12 months ago but still a long way
from its highs.
3)
India (72) - Here
is another of the big 3 countries from last year that�s starting
to look strong. Again,
it's higher than 12 months ago, but a long way from its highs.
4)
Oil (65) � Oil has a strong looking chart, but is currently in a
minor correction.
Austria is
the fifth component, but only because of recent activity.
It�s still weaker than it was 12 months ago.
Five
weakest components:
1)
Gold (12)
-- Still in a strong uptrend, but has had a sizable
correction.
2)
Mexico (27)
3)
Long Term Treasuries
(36) � Interest rates are going down, so this would be expected to
be weak. Plus, the
dollar is not that strong.
4)
Switzerland (43)
5)
Commodities (43)
-- Again, in a correction from a strong uptrend.
Part IV:
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 when the Dow makes new highs.
And the 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/CCI
|
XLB
|
Gold
|
XLF
|
|
Dec-05
|
347.89
|
30.28
|
513
|
31.67
|
|
Dec-06
|
394.89
|
34.84
|
635.5
|
36.74
|
|
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
|
783.5
|
31
|
|
Dec-07
|
476.08
|
41.7
|
833.3
|
28.9
|
|
Jan-08
|
503.27
|
38.62
|
923.2
|
29.14
|
|
Feb
08
|
565.65
|
40.87
|
971.50
|
25.83
|
|
Mar
08
|
525.25
|
40.17
|
934.25
|
24.87
|
|
Apr
08
|
524.85
|
42.31
|
871.00
|
26.61
|
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
|
CRB
2
|
CRB
6
|
XLB2
|
XLB6
|
Gold2
|
Gold6
|
XLF2
|
XLF6
|
Total
Score
|
|
|
Lower
|
Higher
|
Higher
|
Lower
|
Lower
|
Higher
|
Higher
|
Lower
|
|
|
|
Apr
08
|
|
+1/2
|
|
-1/2
|
|
+1/2
|
|
+1/2
|
+1
|
|
The
results of this model still show inflation, but they are the lowest
numbers I�ve seen (at +1) since I�ve been using this model. I
suspect they merely represent a correction. Click
here for more information on the model.
Gold
has now had a 13% correction from its recent highs of over $1,000
and gold stocks have plummeted � some nearly 50%.
In addition even commodities have shown a fall recently.
I would expect this to be a temporary decline in inflation;
however, the Fed is still injecting massive amounts of currency into
the system. The
Shadowstats statistics show no potential for a decline in inflation
whatsoever.
Part V:
Tracking the Dollar
With the
Federal Reserve lowering interest rates, I expect the dollar to
really be weak now. Who
wants to buy treasury bills as the interest rate gets lower and
lower?
So expect currency traders to start selling the dollar and
moving to currencies that pay a better interest rate.
Look at the data in the table because it really says it all.
|
Month
|
Dollar
Index
|
|
Jan
05
|
81.06
|
|
Jan
06
|
84.29
|
|
Jan
07
|
82.37
|
|
Aug
07
|
77.51
|
|
Sep
07
|
75.91
|
|
Oct
07
|
73.93
|
|
Nov
07
|
72.94
|
|
Dec
07
|
73.69
|
|
Jan
08
|
73.06
|
|
Feb
08
|
72.57
|
|
Mar
08
|
70.32
|
|
Apr
08
|
70.47
|
|
May
08
|
71.31
|
Notice that
the dollar is now showing a slight recovery after a massive decline.
However, I am no longer traveling the world, but I�d expect
the dollar to start going down again in July and August once again
as I�ll be a world traveler during that time.
Laugh please, because that�s my attempt at humor today.
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.
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