Feature
Tharp�s
Thoughts
Market
Update for June 2008
Market
Condition: Volatile Bear
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 (first 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
We�ve
had an interesting month of June.
Although I don�t keep that kind of data, I heard it was the
worst June for the Dow Jones Industrials since1930.
And that�s really saying something.
However, the recent downturn has only just changed from a
volatile bull to a volatile bear.
Be careful of this one.
Part II: The
Current Stock Market Type Is Volatile Bear (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, because as soon at 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 doesn�t really fit my current beliefs.
For those of you who are still interested, it is in red light
mode (unless the S&P 500 PE ratio is now below 17, which could
happen any time and that's the reason I stopped using the model).
Two months ago, 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.
That data is included below.
Notice that even though it was a terrible month the market
classified it as volatile sideways until last week when it turned
into a volatile bear market.
2008 Market
Classification
|
Market Condition
|
Date
|
Volatile
Bear |
6/27/2008 |
Volatile
Sideways |
6/20/2008 |
Volatile
Sideways |
6/13/2008 |
Volatile
Sideways |
6/6/2008 |
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 |
You�ll notice
that basically every week of 2008 is volatile (with one exception in
late March). I�d like
to see two straight volatile bear weeks before I really say the
market has changed. But
this market looks pretty brutal.
So now let�s
look at what the market has done during the month of June.
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
|
-0.61%
|
1,248.29
|
3.07%
|
1,645.20
|
1.49%
|
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%
|
30-May-08
|
12,638.32
|
-4.72%
|
1,400.38
|
-4.63%
|
2,032.57
|
-2.51%
|
06-Jun-08
|
12,209.81
|
-3.39%
|
1,360.68
|
-2.83%
|
1,990.39
|
-2.08%
|
13-Jun-08
|
12,307.35
|
0.80%
|
1,360.03
|
-0.05%
|
1,966.01
|
-1.22%
|
20-Jun-08
|
11,842.69
|
-3.78%
|
1,317.93
|
-3.10%
|
1,928.39
|
-1.91%
|
27-Jun-08
|
11,346.51
|
-4.19%
|
1,278.38
|
-3.00%
|
1,855.72
|
-3.77%
|
Year
to Date
|
11,346.51
|
-16.91%
|
1,278.38
|
-14.86%
|
1,855.72
|
-12.35%
|
All three major
indices are still down for the year by double digit losses.
And we�re not too far from an official pronouncement for a
bear market. In fact,
that level (a 20% drop from the high) has been touched intraday. The
Dow was down 10.22% on the month � the largest monthly drop for
the DOW in June since 1930. The
S&P 500 and the NASDAQ 100 were both down 8.7% on the month.
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.
However, I�ll only list the strongest areas if they are up
for the year and not just strong recently (This month there are less
than 5). The relative
strength of each component is given in parenthesis.
Part
III: The Strongest
and Weakest Market Components
Five
strongest components, in order:
1)
Oil (97) Is this surprising?
I don�t think so.
2)
Commodities (91) This is what happens in an inflationary
market.
Others
making the grade were gold and long term treasury bills, but only
because of recent activity.
Five
weakest components:
1)
India (2) -- India was in strength last month and has
had a major correction down.
2)
Belgium (7)
3)
Sweden (11)
4)
Netherlands (24)
5)
A number of areas were tied at (32) � China, Taiwan,
France.
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
|
June
08
|
571.90
|
41.64
|
930.25
|
29.12
|
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
|
|
Higher
|
Higher
|
Lower
|
Lower
|
Higher
|
Higher
|
Higher
|
Higher
|
|
|
June
08
|
|
+1
|
|
-1
|
|
+1
|
|
-1
|
0
|
|
The
numbers suggest that no inflation is present.
I don�t believe them because of the information below.
Click
here for more information on the model.
The
following table shows oil (USO) and natural gas (UNG) prices on
their closes in March through June, along with the percentage
increases. These
figures, in my opinion, give a pretty good idea about inflation
because energy costs will translate into inflation in almost every
aspect of the economy. We�re
seeing double digit increases each month, which would translate into
triple digit annual returns.
Month
|
USO
(oil)
|
%
Change
|
UNG
(gas)
|
%
Change
|
March
|
$81.36
|
|
$48.50
|
|
April
|
$92.50
|
13.7%
|
$52.26
|
7.75%
|
May
|
$103.06
|
11.4%
|
$55.66
|
6.5%
|
June
|
$113.73
|
10.4%
|
$62.83
|
12.9%
|
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 16%,
unemployment (the government doesn�t count people after their
benefits run out) is at 14%, 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
and -2%+. And
perhaps the market is starting to realize that.
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.
Despite that, the dollar has gone up for two months.
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
|
Jun 08
|
71.44
|
I leave for Fiji
on Wednesday and then go to Germany in August.
So based upon the Van is traveling scale, I expect the
dollar to go down substantially in July and August.
I�ll be pleasantly surprised if it doesn�t.
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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