Feature
Tharp�s
Thoughts
Market
Update for July
Market
Condition: Quiet 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
August
has largely been a sideways month, although it shows up on our
classification as a bear month because the 13 week change continued
to be large and down. However,
in my opinion these are some of the worst market conditions that I
have seen since I�ve been a trading coach.
The last secular bear market was 1966 to 1982, and I think
the conditions today are much worse than that.
It�s probably more like 1929 to 1949, which encompassed the
Great Depression and World War II.
Why do I say that? There
seems to be no investment opportunities whatsoever.
All of the world markets look bad.
No country�s equity market looks strong.
And when that happens, you can usually find other areas that
look good such as gold, commodities, oil, etc., but all those areas
are also headed down.
Normally,
even that wouldn�t be bad because there would be good markets to
short. But down markets
all tend to be so volatile that it�s very easy to get stopped out,
so the safest place to be right now is in cash.
But with 113 banks on the FDIC warning list, and FDIC
reserves being very low, I begin to wonder if cash is even safe.
However, I�m sure the Federal Government, through the
printing press, will bail out bank depositors for the FDIC.
Part II: The
Current Stock Market Type Is Quiet Bear
I have now
substituted my new market type for the 1-2-3 model.
The reason I�ve done this is that 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.
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).
The one thing
that is suddenly clear is that the volatile markets that have
characterized most of 2008 for the S&P 500 have now shifted to
quiet markets.
2008 Market Type
|
Market Type |
Week |
Quiet Bear |
8/29/2008 |
Quiet Bear |
8/22/2008 |
Quiet Sideways |
8/15/2008 |
Quiet Bear |
8/8/2008 |
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 |
Let�s look at
what the market has done during the month of August.
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-Aug-08
|
11,326.32
|
|
1,260.31
|
|
1,826.56
|
|
08-Aug-08
|
11,734.32
|
3.60%
|
1,296.32
|
2.86%
|
1,926.23
|
5.46%
|
15-Aug-08
|
11,659.90
|
-0.63%
|
1,298.20
|
0.15%
|
1,957.56
|
1.63%
|
22-Aug-08
|
11,628.06
|
-0.27%
|
1,292.20
|
-0.46%
|
1,931.47
|
-1.33%
|
29-Aug-08
|
11,543.55
|
-0.73%
|
1,282.83
|
-0.73%
|
1,872.54
|
-3.05%
|
Year
to Date
|
11,543.55
|
-14.91%
|
1,282.83
|
-14.46%
|
1,872.54
|
-11.34%
|
While all three
indices were up and down during the month, all three still stand at
double digit losses for the year.
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)
US Long Term Treasuries (86)
2)
Small Cap Value US (83)
3)
Small Cap Blend US (83)
4)
Small Cap Growth (83)
5)
Real Estate (76)
None of these are
really worth investing in right now. You
should probably just
be in cash.
Five
weakest components:
1.
South Korea
2.
India (which was on the weakest, strongest and again
on the weakest)
3.
Malaysia
4.
Singapore
5.
Sweden (31)
These
are also very dangerous to short right now.
As I said, you should probably be in cash.
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. Well, PERHAPS
NOT. When Steve
Sjuggerud and I wrote the chapter on the big picture in
Safe Strategies for Financial Freedom in 2002, I presented
arguments that we could have a deflationary period ahead of us and
Steve presented the inflationary picture.
And with our huge debt and a Federal Reserve that could print
money at will, it was hard for me to see this scenario as being
anything but inflationary. How
could the U.S. tolerate having such a huge debt in a deflationary
time (when money is worth more).
Sure enough, the central banks of the world are printing
money like crazy. M3 for
the United States currently stands at $13.8 trillion and M3 for the
European Union currently stands at $14.1 trillion (converted to US
dollars). These data are
as of May 2008. These
represent one year increases in the money supply of 18.8% and 10.5%,
respectively. Now that
sounds like real inflation.
But what I
didn�t consider were the impacts of defaults.
When credit (which is one of the major ways money is created)
collapses, it is a major deflationary factor.
How is that happening? First,
house prices in the US are down about 10% over the same time period.
In major markets the situation is much worse.
California real estate has dropped about 40% over the last
year. That value of US
real estate is bigger than M3, which offsets about 60% of the money
supply. On top of that,
you have to consider write-offs of derivatives and junk debt.
So far, $540 billion of junk mortgages have been written off
the books and there is a lot more. Freddie Mac and Fannie Mae are
now estimated to have a combined net worth of MINUS $50 billion;
however, they still have assets (stock value and the mortgages).
But if the
Federal Reserve has to bail them out those assets would become
worthless. Much of
those assets are owned by regional banks � many of which are on
the FDIC danger list � and that value would be wiped out.
In addition, China owns $376 billion in US agency debt �
most of which is in the two FMs.
If the Fed has to bail out the two FMs, then that would also
be wiped out and China would not be repaid.
Imagine the international consequences if that happened.
In addition, the credit squeeze is also showing up in the M2
money supply � in which there is now actually a net decrease.
Thus, the 18.8%
M3 increase over the last year could easily be wiped out and be a
net decrease. And that
means there is less and less money to invest.
And when that happens prices go down.
That, my friends, could lead to even more deflation and
deflation combined with large debt is big trouble.
And by the way,
GM had a $15.5 billion loss in the second quarter.
Ford had a $8.7 billion loss in the same quarter.
The auto industry, which has long been the giant of American
industry, is about to collapse without a big loan from the
government. My
understanding is that Ford and GM are currently asking the
government for a $50 billion loan.
Richard Fisher,
president of the Dallas Federal Reserve, says that US unfunded
liabilities now total almost $100 trillion and that doesn�t
include the official debt of the US that has with a current ceiling
of $10.615 trillion. When
the Fed published a study saying that the US was bankrupt, it
estimated our total debt to only be $67 trillion � but that was in
March of 2007 when that study was published.
The US
Treasury�s only response to all of this is to spend, spend, spend.
Last month alone, US spending hit a new record.
So with that in
mind, let�s now look at our measure of inflation/deflation.
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
|
971.50
|
25.83
|
Mar
08
|
516.68
|
40.17
|
934.25
|
24.87
|
Apr
08
|
536.23
|
42.31
|
871.00
|
26.61
|
May
08
|
541.30
|
44.51
|
885.75
|
24.76
|
June
08
|
595.98
|
41.64
|
930.25
|
29.12
|
July
08
|
548.86
|
39.75
|
918.00
|
21.63
|
Aug
08
|
516.47
|
40.38
|
833.00
|
21.42
|
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 that Gold is now flat for the year 2008 and
commodities are only up slightly.
Date
|
CRB 2
|
CRB 6
|
XLB2
|
XLB6
|
Gold2
|
Gold6
|
XLF2
|
XLF6
|
Total
Score
|
|
Lower
|
Lower
|
Lower
|
Lower
|
Lower
|
Lower
|
Lower
|
Lower
|
|
|
Aug 08
|
|
-1
|
|
-1
|
|
-1
|
|
+1
|
-2
|
|
For
the first time since I�ve been calculating these figures, they are
showing the potential for deflation.
Even energy prices are now going down.
Meanwhile
at www.shadowstats.com,
John Williams tells us that the government is increasing the money
supply, (M3, no longer reported by the government) to over 15%,
unemployment (the government doesn�t count people after their
benefits run out) is at 14%, the CPI is running at over 13% (the old
CPI the way it used to be calculated), and all that means is that we
are in a severe recession with the inflation adjusted GDP growth
and -2%+. And banks are
folding with 113 currently on the FDIC warning list.
Part V:
Tracking the Dollar
Okay the Tharp
effect on the dollar showed is first contrary indicator that I can
remember. The dollar
went up almost the entire time I was in Europe.
Month
|
Dollar
Index
|
Jan 05
|
81.06
|
Jan 06
|
84.29
|
Jan 07
|
82.37
|
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
|
70.91
|
Aug 08
|
74.09
|
Notice that last
month, most of which saw me in Europe, the dollar rose to a value
higher than at the end of January this year.
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.
|
Trading
Tip
Traders�
Business Planning: Protecting Your Tools � Starting with
Your Computer
by
D. R. Barton, Jr.
"If
builders built buildings the way programmers wrote
programs, the first woodpecker that came along would
destroy civilization." --Author Unknown
**Special note:
Important business planning steps are listed below!
Please read through the computer-based rant!
I spent part of my family
vacation (too large a part, might I add) battling computer
gremlins. Viruses
and Trojans. Back-up
program quirks. Vista
/ Office 2007 incompatibilities.
And the list goes on.
Now is the time for all the
Mac OS / Apple users out there to chuckle and say, �We
don�t have those problems.�
Except that in the same
breath, those users have to say, �We also can�t use an
exhaustingly long list of programs.�
Most of the trading programs in the world cannot be
run on Mac OS. But
wait! You can run Windows based software on a Mac now.
Right again, but in doing so we�re back to the
issues inherent with running Windows (virus protection,
etc.) regardless of the hardware being used.
Now, before I get inundated
with letters of fury from the Mac faithful, let me say
that I believe Macs offer superior design and hardware.
They just can�t run all of the software I need.
I bought a maxed out MacBook Pro just a few short
months ago, gave it a go and decided that living in a two
operating system world just isn�t for me.
And I was a dyed-in-the-wool Mac user from 1986
until 1996, so I do appreciate the Mac.
But alas, most of us
traders and investors must spend at least part of lives
living in the Windows world.
So let me talk about a few of the things that I
have discovered over the last six weeks that might help
make your business plan for trading more robust.
Three
Items for Every Trader�s Business Plan
Both Van and I have been
writing about the importance of business plans for many
years. I wrote
the business planning chapter in Van�s book Financial
Freedom Through Electronic Day Trading (which he wrote
with Brian June). The
only area that was left out in that chapter was
contingency planning for problems that might arise.
And computers are one of the most important areas
for all traders and investors, since that is one of our
most used tools. Here
are three things that all of us need to think about:
� Back-up.
Back-Up. And Back-Up Again.
Hard drives will fail.
It�s not a matter of if, but when.
I have had two laptop drives fail in the past 20
months.
In my recent virus attack,
I was finally able to recover fully because I had a shadow
image of my drive saved on a local hard drive.
There are many good back-up programs that create
such a drive image. And
hard drives are really cheap these days.
A high quality 1TB drive (1000 Gigabytes) can be
found for $200 dollars or less, and many of them ship with
very functional back-up and imagining software included.
Having a local back-up is critical because most
retail online back-up solutions (see next bullet point)
limit the rate at which you can upload or download, so to
get back up and running quickly, you really need to have
this low cost protection (a physical local hard drive) in
place.
� Back-Up
Offsite. What
if something happens to your local hard drive(s)?
I was convinced I was protected with a back up hard
drive and a nightly synchronizing with another computer
until I thought about my office � what would happen in
case of fire (or a flood, tornado, etc.)?
What if all of my back-ups are in one room?
So I did some research and
picked out Mozy (mozy.com) as the best for my situation.
As with most of the lower cost small business
solutions (Cabonite, XDrive, iBackup) the rate of data
transfer is throttled to reduce to cost of operations.
I don�t keep a full drive image on Mozy, just my
essential files (documents, e-mail, trading files, etc.).
� Anti-ViRus
and Spyware.
I won�t go into any particular companies and
their shortcomings in this areas, but I will share my
research. Some
companies have done independent research on the major
anti-virus packages (zdnet.com has a good compilation).
The findings are that Kaspersky is currently tops
in effectiveness. Norton
is not too far behind.
All of the other packages are lagging these top two
at the moment. But
remember that no package catches 100% of intrusion
attempts. And
in this area, a little common sense on what to click on
and what to avoid will go a long way!
Make sure your business
plan has contingency plans for things that can knock you
out of action. And
protecting your computer data (and usability) should be on
the top of that list!
As always, comments are welcome: drbarton �at�
iitm.com.
Until next week�
Great
Trading!
D.
R.
About
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
Advisor magazine.
You may contact D.R. at
�drbarton� at �iitm.com�.
|