Update for January
Condition: Volatile Bear
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 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 this 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 type (first mentioned in the April 30 edition of Tharp’s Thoughts), 2) the five week status on each of the major U.S. stock market indices, 3) our four star inflation-deflation model plus John Williams’ statistics, 4) tracking the dollar, and 5) the five strongest and weakest areas of the overall market.
Part I: Market Commentary
At the end of 2008, it appeared as if the market was in a consolidation phase and that it could either go up or down. It was on the high side of that range, so everyone seemed to assume that the market had made a V-bottom in November and would be going up 10-15% in 2009. To me that seemed rather
ridiculous. I thought the fundamentals behind the market crash were likely to get much worse rather than better. Anyway, January of 2009 was one of the worst
months on record, and we’re back in volatile bear conditions.
I’m writing this report from Bangkok, and I’ve just met with a businessman here
whose company sells fabric dye to companies all over the world. He says his business is down 80%. Big companies are not making payments, which is very rare, and most of them are not ordering anything. To compound things, he only has two ways to solve the
problem: cut cost or increase sales. Thai laws say that an employee who has been with a company over 6 years has to be given 30 days notice and 10 months of severance pay. In some countries in Europe, things are much
worse because layoffs are not even possible. If you cannot run your company, then you must turn it over to the workers to run
it. It doesn’t matter if you are the one who is losing money.
Economic models are just beliefs that shape the reality of the people who believe them.
Usually under extreme conditions, they all break down. Right now the world still seems to believe Keynesian economics, which says you can restore the economy if you
US debt is horrendous. Interest rates are near zero. And the only way we can stimulate
the economy is to print
money? Does that even make sense? Not to me.
The Davos economic conference proved nothing except that
politicians, central bankers, and the world’s richest people seem to go together. I found it interesting that CNBC in Europe interviewed a Russian billionaire who was willing to spend $200,000 to attend
the conference because of the people he’d meet in a short period of time. However, the overall trend was protectionism (but not as bad as in the 30s) and the overall consensus
was no one knew how to solve any of the problems.
Incidentally, the world seems to have the same Barack Obama euphoria that we’re seeing in the
US. In Dubai, Bangkok, and Sydney, I see all the same magazines (including foreign ones) celebrating his election.
The news seems to be dominated with the euphoric idea that he can solve the
which will solve the world's problems. Hmm...
Part II: The Current Stock Market Type
Is Volatile Bear
My market type calculator is giving me troubles while on the road, so I won’t be showing you the data this month. However, we are clearly in volatile bear market mode. Next month I’ll be back at home, and I’ll publish the market type data.
In addition, I’m also getting many questions on how I calculate market type. All of that has been given in past issues of
Tharp’s Thoughts. However, we are planning to explore some more issues involving market type, and I’ll be doing an article devoted to that topic shortly.
So let’s look at the market changes over the last month as shown in the
table below. All four indices are down more than 40% when you add the change for 2008 and the change for January together.
Changes for the Three Major Stock Indices
In addition, the Asian version of the
Wall Street Journal had a convenient listing of various world listings over the last year and the results are quite shocking, so I’ve added that information below the
US market picture.
Notice that of the 22 countries listed, the U.S. broad market ranks as the 20th
Part III: The Strongest and Weakest Market Components
I have a new model in which we track the relative strength of the various ETFs representing the economy of the entire world. I will be publishing this once a month. Ken Long, who developed the algorithm we use, publishes a similar report every weekend at
www.TortoiseCapital.com. If you’d like more information, then I’d suggest you attend our ETF workshop, which is held several times each year. Ken explains how these numbers are derived in this workshop.
The areas in green are strong and those in brown are very weak. By the way, I usually consider strong to be in the
70s, and there is obviously nothing in that range on this particular chart. My entire world view is continued in the charts below. You have to be an
ultra ETF (i.e., leveraged) to be rated in the 70s.
Here are the top areas of the world as of January 30th:
1) Silver 76
2) Gold 69
3) Chile 65
4) US Dollar Bullish 61
5) Yen 59
6) Biotech 57
7) Rupee 56
The next part of the chart shows commodities, real estate, and interest rate products. It also shows the top and bottom 15 ETFs. We don’t list those
individually because most of the top and bottom performers are leveraged at least 2 to 1.
The whole world is weak and, except for short funds, none of the markets are anywhere near their 12 month highs, so don’t get too excited about jumping into green areas. Remember in my overall world assessment I said that the next bubble to burst would be interest rates. If you look at the top performers
for the last two months, they were dominated by bonds. Now, only the short term bonds show up as being green.
Part IV: Our Four Star Inflation-Deflation Model
Once again, we are in a credit contraction mode, so it is not the inflationary bear market I once thought we were going to get six or seven years ago. The entire world is experiencing a credit contraction. We’re in a second stage deflation, which typically is supported by governments and ends when the governments fail. Iceland has now collapsed and the new joke is “What is the capital of
Iceland?” The answer being $25.
Yes, the Federal Reserve and other central banks are printing money like crazy, but they cannot print it as fast as money is disappearing in the credit crunch. What happens in a credit crunch is that cash is king.
Once again, cash is king, but it must be safe. When all of the bankruptcies play out, then money will be printed like crazy to stimulate what’s left of the economy. And at that point, gold is the king and that’s already showing up. This is my personal opinion.
So with that in mind, let’s now look at our measure of inflation/deflation.
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 the financials have now hit the single digit mark.
Our model is suddenly swinging back to inflation. However, much of this is because gold is very strong. It’s not in new high ground in terms of the dollar, but remember that the dollar has been one of the strongest currencies in this crunch.
Part V: Tracking the Dollar
The dollar is continuing its uptrend because of deleveraging.
The dollar is strong, but only because of the move from July through November. Over the last two months it actually
has fallen as the Federal Reserve interest rates have shrunk to virtually zero. Let me restate what I said last
month: I think we’ve seen the peak on the dollar.
How is the US going to fund its massive debt with interest rates at zero? Expect the U.S. dollar to stop being the world’s reserve currency in 2009 or 2010 at the latest.
Until next month, this is Van Tharp.
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.