Feature
Tharp�s
Thought
Market
Update for May 2008
Market
Condition: Volatile Bull
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 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
Once again I
want to encourage you to read The
Web of Debt: The Shocking Truth About Our Money System and How We
Can Break Free by Ellen Brown, JD.
I talked about it extensively in last month�s update.
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. Notice
the main issues that McCain and Obama talk about and how the media
picks up on them:
�
How Hillary is
insensitive because she referred to the RFK assassination in June.
�
McCain and Obama
fighting over veteran�s rights.
�
McCain criticizing
Obama because he says he would talk to the leaders in Iran, Cuba , etc. and that must mean he�s soft on terrorists or something
like that.
�
Obama saying we need to
shake up the beauracracy in Washington and get them out of town.
We have a
bankrupt country that is trillions in debt. Savings among Americans are negative, which has not occurred
since the Great Depression. We
are having record numbers of mortgage foreclosures as people lose
their homes. And
all of this relates to the Web of Debt problem.
But our political process, as it was intended, and created,
to do, is totally ignoring the main problem.
So with that
said, let�s get on with the market commentary.
Part II:
The Current Stock Market Type Is Volatile Bull (but only for one
week so it could easily move back to Volatile Sideways)
I have now
substituted my new market type for the 1-2-3 model. The reason I�ve done that is 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.
Last
month, I started a new measurement of market type based upon rolling
13 week windows for market direction and the average weekly change
over the last seven weeks for market volatility.
I made two mistakes, which we corrected the next week, in
that I forgot to tell you that I measure market volatility as the
average (absolute value) weekly change over the last seven weeks.
Also the date was wrong (it was giving Monday�s date but
the weeks closing price on Friday).
All of that is corrected and up- to-date for the entire year
in the table below.
Market
Condition |
Date |
Volatile
Bull |
5/31/2008 |
Volatile
Sideways |
5/23/2008 |
Volatile
Sideways |
5/16/2008 |
Volatile
Sideways |
5/9/2008 |
Volatile
Bull |
5/2/2008 |
Volatile
Sideways |
4/25/2008 |
Volatile
Sideways |
4/18/2008 |
Volatile
Sideways |
4/11/2008 |
Volatile
Sideways |
4/4/2008 |
Quiet
Bear |
3/28/2008 |
Volatile Bear |
3/21/2008 |
Volatile Bear |
3/14/2008 |
Volatile Bear |
3/7/2008 |
Volatile Bear |
2/29/2008 |
Volatile Bear |
2/23/2008 |
Volatile Bear |
2/15/2008 |
Volatile Bear |
2/8/2008 |
Volatile
Sideways |
2/1/2008 |
Volatile Bear |
1/26/2008 |
Volatile Bear |
1/18/2008 |
Volatile Bear |
1/11/2008 |
Volatile Bear |
1/4/2008 |
Quiet Sideways |
12/28/2007 |
You�ll
notice that basically every week of 2008 is volatile (with two
exceptions) However,
we�ve moved from generally bearish to sideways with an occasional
volatile bull period � and perhaps that is now coming.
Let�s look at what the market has done during the month of May.
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%
|
01-May-08
|
13,010.00
|
|
1,409.34
|
|
1,980.44
|
|
08-May-08
|
12,866.78
|
-1.10%
|
1,397.68
|
-0.83%
|
1,966.86
|
-0.69%
|
15-May-08
|
12,992.66
|
0.98%
|
1,423.57
|
1.85%
|
2,031.34
|
3.28%
|
22-May-08
|
12,625.62
|
-2.82%
|
1,394.35
|
-2.05%
|
1,964.92
|
-3.27%
|
30-May-08
|
12,638.32
|
0.10%
|
1,400.38
|
0.43%
|
2,032.57
|
3.44%
|
Year
to Date
|
12,638.32
|
-4.96%
|
1,400.38
|
-4.85%
|
2,032.57
|
-2.58%
|
All three
major indices are still down for the year, but only slightly.
Also notice that the NASDAQ has had three weekly movements
more extreme than plus or minus 2.5%, the DOW has had one, while the S&P
500 has only had one weekly change with an absolute value greater
than 2%. Generally,
the market is becoming quieter even though it still shows up as
volatile.
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 (88) - Brazil
was the strongest last week and has remained so.
2)
Latin America
(78) - Another giant is
resuming its uptrend.
3)
Mexico
(71) - Latin America is strong as are two of its components,
Brazil
and Mexico.
4)
Oil (70) � Oil is one of the big winners on the year and still
looks strong.
Other strong components are big cap growth companies (QQQQ), midcap
growth companies (IJK) and Canada (EWC).
This is the first time that U.S. stocks components have surfaced at all for a long time.
Five
weakest components are:
1)
India
(9)
--
India
was strong last month and has had a major correction down.
2)
Belgium
(25)
3)
LT Treasuries (25)
4)
Corporate Bonds (26)
5)
Malaysia
(27)
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
|
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
|
May
08
|
550.91
|
44.51
|
885.75
|
24.76
|
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
|
|
Higher
|
Higher
|
Higher
|
Higher
|
Lower
|
Higher
|
Lower
|
Lower
|
|
|
May
08
|
|
+1
|
|
+1
|
|
+1/2
|
|
+1
|
+3.5
|
|
Last
month, I had the lowest numbers I�ve seen, but I suspected that
they were an abnormality.
And this month, again suggests strong inflation.
Click
here for more information on the model.
What�s
ironic are the government statistics on inflation!
In April the government reported the CPI at 0.2% vs. consensus 0.3%; ex-Food & Energy 0.1% vs.
consensus 0.2% The
May report for April�s statistics showed energy expenses were
unchanged after a 1.9% increase in March as gasoline prices
dropped 2%. Fuel oil costs jumped 4.4% and natural gas
prices climbed 4.8%.
The
following table shows oil (USO) and natural gas (UNG) prices on
their closes in March, April, and May, along with the percentage
increases. And
those figures will translate into inflation in almost every aspect
of the economy.
Month
|
USO
(oil)
|
%
Change
|
UNG
(gas)
|
%
Change
|
March
|
$81.36
|
|
$48.50
|
|
April
|
$92.50
|
13.7%
|
$52.26
|
7.75%
|
May
|
$103.06
|
10.3%
|
$55.66
|
6.5%
|
Oil went up 13.7% during the month of March and another
10.3% during April, while natural gas rose 7.75% and 6.5%
respectively. Those
translate into annual rates of over 100%, and energy factors into increased prices for almost
everything. And
the government is telling us what?
Well, there are lies, damned lies, statistics, and then
government statistics! I
guess the government thinks it can tell us anything and we�ll
believe it.
Meanwhile
at www.shadowstats.com, John
Williams tells us that the government is increasing the money supply
(M3, no longer reported by the government) at 17%, unemployment (the
government doesn�t count people after their benefits run out) is
at 13%, the CPI is
running at near 12% (the old CPI the way it used to be calculated),
and all that means is that we are severely in a recession with the
inflation adjusted GDP growth around
-2%.
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
|
70.75
|
Notice that
the dollar is now showing a slight recovery after a massive decline.
I�m going to Fiji
next month and Germany the month after that. Thus,
you can expect to see the dollar falling a lot in those months.
Again, laugh, because that�s my attempt at humor today.
It won�t be so funny when I�m in Europe.
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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