Implications of a Secular Bear Market
Van K. Tharp, Ph.D.
By the end of 2000, I
said to everyone that we were in a secular bear market that would
last 15-20 years. When
the bull market of 2003 happened, the media announced (and many
people believed) that the bear market was over and a new major bull
market had begun. But I
pointed out that while the market was up strongly in 2003, the
dollar was down against the Euro by almost 40% in 2003.
That’s not something to cheer about.
My purpose in writing
this article is to refresh you on the potential impact of the
secular bear market and to remind you that what we teach at the Van
Tharp Institute should enable you to profit handsomely during such
times of crisis. In
addition, I want to review some of the principles that are required
to profit during these times. If
you forget even a few of them, you could lose a lot of money.
These principles do work, but you must apply all of them
for the best success.
On July 20, 1998 the
S&P 500 stood at 1140.80. Ten
years later on July 16, 2008 the S&P 500 stands at 1245.36.
That amounts to a 10-year gain of 104.56 points or 9.1% in
ten years. That’s a
compounded annual growth rate of 0.88%.
That’s what I’d expect from a secular bear market, and it
could get much worse. The
media is just starting to admit that we are 1) in a recession and 2)
in a bear market. What
happened to the 10% per year that the financial gurus were
advertising for people to just buy and hold?
Add to that the following facts:
St. Louis Federal Reserve published a study that basically
concluded that the United States was bankrupt with a debt of 67
trillion dollars, including future obligations.
read the article.
However, I’ve seen estimates that our total obligations
are now more like 90 trillion.
And, of course, no one in politics today is saying
Ten years ago, the dollar was
at 101.10 versus other major currencies.
Today, it is worth 70.78.
That’s a drop in real wealth of 29.8% during the last
Real inflation is much higher
than the governments adjusted CPI figures and is currently
running over 12% based upon the way the U.S. government used to
calculate the CPI. Thus,
you could have easily lost about 9% a year to inflation over the
last ten years.
Today, we’re looking at
energy inflation of about 10% per month (see the last few issues
of Tharp’s Thoughts),
which affects the entire economy and could easily translate into
a huge real CPI increase based upon the way the government used
to calculate such statics.
In addition, the media is
starting to publish articles saying that stocks are at bargain
prices. And Warren
Buffett is being quoted as saying that he’d love to see prices
go down 50% because then he could buy a lot more at bargain
prices. But you are
not Warren Buffett, and I personally wouldn’t want to have
money invested in Berkshire Hathaway over the next 10 years.
(IITM’s retirement fund actually owns one share of the
B series so that I can get his comments regularly).
Debt in the U.S is at
staggering prices and home prices are down substantially.
The major banks are in a huge
financial crisis and really don’t understand what is going on.
J.P. Morgan for example has 90 trillion in derivative
exposure and the only thing saving them is that they are the
largest owner of the Federal Reserve and the Fed has guaranteed
that they can turn in their junk for treasury bills (on a
temporary basis that could be permanent).
And lastly, the baby boomers
are about to retire, which will pull a huge amount of equity out
of the stock market.
all of the doom and gloom, what’s the answer?
The first thing I want you to know is that there are positive
forces going on that will eventually more than counteract all of
this. I’m not prepared
to talk about them at this time, but they do exist.
Second, you absolutely must do some work to educate yourself.
Good trading is a profession, and I believe that it takes a
solid two years of work to educate yourself to the point where you
can apply these principles. You
can probably coast after the two years, but I don’t believe that
you can use the excuse “I’m just an average investor” to keep
you from learning the principles and doing the work.
as a refresher here are major principles that you must thoroughly
Trading is 100% psychology so you must master
everything is psychology, so that’s why I can make that
statement. You can
only trade your beliefs (which are psychological filters to
reality). Even the
act of executing a trade involves the mental strategy of 1)
seeing the signal; 2) recognizing in your brain that this is the
signal you should take; 3) feeling good about it; and then 4)
Given that everything is psychological, success
in the markets is 60% discipline, 30% position sizing, and 10%
system. You can have
a great system that will be destroyed by mistakes created by a
lack of discipline.
You should never enter into a position without
having a worse case exit, which I call a 1R (R stands for risk).
You also need profit taking exits.
The bottom line is that you should always be looking at
cutting your losses short (making them 1R or less) and letting
your profits run (making them much bigger than 1R).
You need to develop a business plan that
includes (but there is a lot more) the big picture, at least
three non-correlated (totally different concepts) systems, and a
worst case contingency plan.
Your system must fit your beliefs about the
market or you will not be able to trade it properly.
You need to know how your system will perform
in various types of markets.
And my definition of market type (based upon the S&P
500) is published monthly in Tharp’s
you have a market type in which your system does not perform
well, you shouldn’t be trading a system that works in that
type of market.
90% of performance variability is due to position sizingSM and few people understand that concept.
If you don’t know yourself, then you cannot
determine what you really want from the markets.
Your system has nothing to do with meeting your
objectives. You meet
your objectives through position sizingSM.
Few people understand this, even those who understand the
impact of position sizingSM.
make money under these conditions, and you do can so without doing a
lot of work (perhaps trading a few hours a day).
For example, we have systems that I would define as Holy
Grail systems. Some of
them are even fairly long term, but you must know when to apply
them. And most of you,
right now, would make so many mistakes trading them that you would
destroy them – at least until you have done the necessary
let me repeat, you meet
your objectives through position sizingSM.
A Holy Grail trading system would only make it easy to do.
get to the point where you can do that easily, requires some work.
And please don’t use the excuse, “I’m just an average
investor!” Did you
start in your profession without any training, saying “I’m just
an average doctor or engineer or IT professional?” No,
you didn’t. You
prepared yourself. What
most of you are doing as “average investors,” trading in
today’s market conditions without adequate preparation, is
equivalent to operating on someone’s brain without any training or
building a bridge without any training.
If you did so, the person you were operating on would
probably die (99.9999%) and the bridge would collapse.
Investing in today’s secular bear market without thoroughly
understanding all of the above principles means that your financial
nest egg will probably die. Many
of you did that in 2000-2002. Don’t
keep doing it.
be amplifying on these principles on future articles in Tharp’s
Thoughts. In the
meantime, my recommendations for you to be adequately prepared would
be to do the following in this particular order:
Read the second edition of Trade Your Way to Financial Freedom until you thoroughly understand
it and all the concepts. This
may take numerous readings.
Take our Blueprint
for Trading Success workshop.
This, in my opinion, is the core workshop that we offer
gives you a thorough understanding of what you need to do to
Complete the Peak
Performance Home Study Course thoroughly.
That might take several readings and months to do.
Once you’ve done those three things, you’ll
probably have a good idea of all of the other information and
resources that you’ll need.
And we offer those, but you need this foundation first.
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.
Oil and Gas –
Crudely Speaking Part X:
The Real Wrap-Up or “Ten is Enough”
In the short-run, the market is a voting machine; in the long-run, the market is a weighing
This week, we’ll wrap up our crude oil and gas series on a technical note.
In the past week, we’ve seen the world order turned on its head (at least from a financial market’s perspective); oil is down, homebuilders are up, grains are down, dollar is up – even the bedraggled financials are trying to dig out of the price pit.
But let’s not all join hands and start dancing the Lobster Quadrille to honor the passing of the tough markets just yet!
While it feels good to get some relief from fairly relentless inflationary and bear market pressures, let’s bring a little rational thought to the picture (and in the form of some pictures…).
First, let’s look at one of my favorite charts – the relative performance charts from the folks over at Stockcharts.com.
You can tell which solid line is which by using the key at the top of the chart. Each line shows the percentage movement away from an arbitrary date that is 200 trading days in the past.
And hasn’t it been an interesting 200 days? Crude is way up; agricultural commodities are strong too, as is gold.
The most surprising thing?
The S&P has been weaker than the dollar. And while a declining dollar has played a roll in the run-up of all of the assets that above the “0” line on our chart, it’s clearly not the major reason.
Also, there’s no surprise that financials and homebuilders are the weakest things on the chart; the credit crunch has been painting all players within its impressive reach with a very broad brush.
So that’s the history. What might the future hold?
Crude is coming up to a very important technical juncture as seen on the chart
For those of you who haven’t seen this chart in previous weeks, the blue “fan” lines are just accelerating rate-of-change lines that I drew as crude was powering up. It has now broken all of them in a matter of three weeks.
(As my good friend Chuck LeBeau says, “Markets crawl up the stairs and jump out the window.”)
We’re seeing increased volatility in many markets (see the crude chart above where volatility is approaching its all time high from just this past June). This volatility bodes well for day traders, but can be tough to manage for swing
or longer term players.
We’ll be talking next about the current state of the day trading market as I grow more
excited about our highly reviewed E-Mini Index Day trading seminar that is coming up in September. It will be the only one we’re doing this year, and we’re adding some new concepts and trading strategies that I’m truly stoked about! Until next week…
Please keep those comments coming to drbarton “at”
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. He is a regularly featured guest on both Report
on Business TV, and
WTOP News Radio in Washington, D.C., and has been a guest
on Bloomberg Radio. His
articles have appeared on SmartMoney.com and Financial
You may contact D.R. at
“drbarton” at “iitm.com”.
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