Feature
Market
Update for July 2008
Market
Condition: Volatile Bear
by
Van K. Tharp, Ph.D.
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
The secular bear market continues‼! On July 29th the S&P 500 closed at 1263.19. Ten years ago, at the end of July in 1998, the S&P
500 closed at 1120.67. Thus, if you�d held the S&P 500 for ten years (and that includes selling all of those that dropped out of the average and buying the new entries), you�d be up a total of 142.52 points. That�s a compounded annual growth rate of 1.2% -- almost 25% higher than when I calculated it
two weeks ago. But that included the last two years of the massive bull market that ended in 2000. Eight years ago, at the end of July
2000, the S&P 500 stood at 1462.93. Thus, in the last eight years since the secular bear market began, you would have LOST 199.74 points or 13% by buying and holding the U.S. stock market. That is a compounded annual loss of -1.2%. And that�s while the dollar has lost about 40% against the Euro and the real rate of inflation has been very high (according to
www.shadowstats.com).
That�s why I keep telling people that you cannot afford to just say �I�m an average investor.� That�s equivalent to a brain surgeon saying, �I�m just an average brain
surgeon," meaning he�s had no expert training in his craft except to perhaps kill a few
people. You need to train yourself to really be able to make money in these markets because, in my opinion, we have at least another 8 years to go on the secular bear market.
By the way, gold currently stands, as of the London PM close on July 29th, at $923.50. On July 31st 2000, gold was at $276.75. If you had bought and held gold over the last eight years, your annual return would have been 16.26% and you would have been ahead of inflation. And that�s buying and holding. As a trader you could have done much better and there were many other investments that have done very well at various times during this secular bear � such as the Brazilian and Chinese stock markets.
We�ve had an interesting Month of July � even though I�m writing this just before July ends because of my trip to Germany. This is a very scary market right now and most of you should probably be 100% cash.
Part II: The Current Stock Market Type
Is Volatile Bear
I have now substituted my new market type for the 1-2-3 model.
I�ve done that 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).
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.
2008 Market Classification
|
Market
Condition |
Date |
Volatile
Bear |
8/1/2008 |
Quiet
Bear |
7/25/2008 |
Volatile
Bear |
7/18/2008 |
Volatile
Bear |
7/11/2008 |
Volatile
Sideways |
7/4/2008 |
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 and one exception in July).
So now let�s look at what the market has done during the month of July.
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% |
3-Jul-08 |
11,288.53 |
-14.90% |
1,262.90 |
-13.99% |
1,816.35 |
-12.88% |
11-Jul-08 |
11,100.54 |
-1.67% |
1,239.49 |
-1.85% |
1,810.88 |
-0.30% |
18-Jul-08 |
11,496.57 |
3.57% |
1,260.68 |
1.71% |
1,823.23 |
0.68% |
25-Jul-08 |
11,370.69 |
-1.09% |
1,257.76 |
-0.23% |
1,846.55 |
1.28% |
29-Jul-08 |
11,397.56 |
0.24% |
1,263.19 |
0.43% |
1,845.55 |
-0.05% |
Year
to Date |
11,397.56 |
-16.38% |
1,263.19 |
-16.24% |
1,845.55 |
-12.97% |
The last week only includes two days as I�m preparing to go on a trip and cannot write this on the weekend.
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. We�re also officially in a bear market because we�re down 20% from the October
2007 highs.
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. The relative strength of each component is given in parenthesis.
Part III: The Strongest and Weakest Market Components
Five strongest components, in order:
1) Gold (66)
2) India (66)
3) Small Cap Value US (66)
4) Small Cap Blend US (65)
5) Long Term Treasuries (63)
None of these are really worth investing in right now. India was the weakest component last month. You should probably be in cash right now.
Five weakest components,
in order:
1. Belgium (19)
2. Brazil (22)
3. Austria (25)
4. Latin America (26)
5. Sweden (31)
These are also very dangerous to short right now. Remember that India was the weakest component last month and it jumped to the second highest.
As I said, you should probably be in cash right now.
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.
The inflation is obvious, but simply masked by government statistics.
Now let�s look at the results for the last six months. Remember that the Fed has now chosen to produce inflation and a strong dollar devaluation over the pain of the subprime crisis. The end of the month values for July are July 28th-29th values, not July 31st.
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 |
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 |
971.5 |
25.83 |
Mar 08 |
525.25 |
40.17 |
934.25 |
24.87 |
Apr 08 |
524.85 |
42.31 |
871 |
26.61 |
May 08 |
550.91 |
44.51 |
885.75 |
24.76 |
Jun 08 |
571.9 |
41.64 |
930.25 |
29.12 |
Jul 08 |
544.01 |
39.87 |
916.75 |
21.37 |
We�ll now look at the two-month and six-month changes during the last six months to see what our readings have been. Notice the huge drop in the financial (XLF) so far this month.
Date |
CRB2 |
CRB6 |
XLB2 |
XLB6 |
Gold2 |
Gold6 |
XLF2 |
XLF6 |
Total
Score |
|
Lower |
Higher |
Lower |
Higher |
Higher |
Lower |
Lower |
Lower |
|
Jul
08 |
|
+1/2 |
|
+
1/2 |
|
-
1/2 |
|
+1 |
+1.5 |
Again the numbers suggest that inflation is present, but getting weaker. I don�t believe them because of the information below.
Click
here for more information on the model.
This time, energy is confirming the decline in inflation.
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 just 16%, unemployment (the government doesn�t count people after their benefits run out) is at 14%, the CPI is running at over 12% (the old CPI the way it used to be
calculated). We are definitely in a recession with the inflation adjusted GDP growth
at -2%+. And banks are folding.
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. However, 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 |
Jul 08 |
70.84 |
Based upon the
"Tharp factor" (I�m going overseas), expect a new low in the dollar before I return on August 18th. I�ll be pleasantly surprised
if something different occurs.
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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