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Tharp’s Thoughts

Market Update for April 2009

Market Condition: Volatile Sideways

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 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 2008 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

The market has changed a lot since I went on vacation, but it isn’t any less dangerous. The conditions behind the market drop have not changed at all except that we have a new president and a new administration. But what can a new president do with nearly impossible conditions? We’ll let the market tell us what to do. We could easily have a nice rally this year and if the market turns to bullish, then it’s time to be invested. Nevertheless, overall we are still in a ferocious SECULAR BEAR market with nasty fundamental conditions behind it. The fundamentals have not changed and we are nowhere near the technical conditions under which such markets end (i.e., typically PE ratios for the S&P 500 in the single digit range and yields on the S&P of 6% or higher).

Part II: The Current Stock Market Type Is Volatile Sideways

The market type shifted to volatile sideways. The table shows two different ways of calculating it. Method 2 is the traditional way that I’ve been doing it. However, dropping off a large down week 13 weeks ago can change the market type even if nothing is happening now, which is a problem. As a result, Method 3 uses an exponential moving average to replace the data of the 13th week. I plan to have a discussion about market type (including these two and one other method) in Tharp’s Thoughts later this year.

Notice that the old method put us in a volatile sideways market shortly after I left on vacation; whereas, the other method put us in volatile sideways on April 13th and was more consistent in keeping us in volatile bear prior to that.

So let’s look at what’s happening in the three major U.S. indices.

Year to date the NASDAQ is up and the other two indices are still down; however, three of the last four weeks have been up weeks.

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 in which Ken explains how these numbers are derived. The next ETF 101 workshop is this month followed by a two-day advanced ETF 202 workshop. You can sign up for both here.

The areas in green are strongest (the total rating is at least one standard deviation above the mean); those in yellow are the next strongest (above the mean). Those below the mean are in brown; and those more than one standard deviation below the mean are in red. I’ve also taken all of the double leveraged funds out of my database, which means that the top and bottom funds are not devoted entirely to those groups.

Since most areas are generally weak and our relative strength is influenced most by recent activity, I’d suggest that you not rely on this information to determine what sectors of the world to invest in. This could support your ideas, but it should not be the only basis.

Notice that the strongest sectors are Taiwan (74), Gaming (72), Networking (67), Homebuilders (66), and Retail (65). None of these are areas that really excite me. The really weak areas are Pharmaceuticals (34), The Mexican Peso (35), Mexico (38), Regional Banks (38), and Utilities (38).

View Larger Image

The next part of the chart shows commodities, real estate, and interest rate products, along with the top and bottom 15 ETFs.  As I said, I’ve taken out the double leveraged funds so that we have a better example of the overall world picture.

Notice that suddenly we have even more strong and weak areas.  So let’s add timber (74), small cap value (89), basic materials (77).  The Templeton Russian fund is strong, but it’s now selling at a huge premium (as a closed end fund) and the Russian ETF doesn’t look that strong.

Part IV: Our Four Star Inflation-Deflation Model

Once again, we are in credit contraction mode, so it is not the inflationary bear market I once thought we were going to get six or seven years ago.  But I suspect that we’ll be in one by the end of 2009.  Gold is certainly suggesting that.

We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.  The CRB is finally bottoming.

Our reading is now showing that inflation is coming back, which would be expected with the printing presses printing money at a record pace.

Part V: Tracking the Dollar

The dollar is continuing its uptrend because of deleveraging.

The dollar has been in an uptrend since July, but it could be topping out. Don’t expect this to continue for much longer (at most through the end of the year).

General Comments

Crisis always implies opportunity.  There is plenty of opportunity for short term trading and if you are interested, I’d suggest that you come to our ETF workshops.  However, there is nothing that excites me long term.  Warren Buffett has had his biggest losses in the history of his company and he has a large derivative exposure in which he is betting that the stock market will drop a lot further.

Until the next update, this is Van Tharp.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books 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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More Top Notch Internet Resources Part VII
Stock Screening - Prep for Technical Scans

by
D.R. Barton, Jr.

I’ve been on a golfing quest over the last couple of weeks to buy a replacement set of irons. The Ping Zing 2s in my bag have been faithful servants. But my son Josh now plays on his high school golf team, and I’m hoping a little technology will help me keep up. The dad in this family has no plans to concede golfing supremacy to his 14 year old son without a fight. But I do recognize that I’m losing the battle; he’s getting bigger and stronger every day—and me? Not so much. 

As you can imagine, my quest for the right set of irons has been a fairly extensive one. I’ve read online reviews (there aren’t that many good ones) and talked to good golfers that I know. Today, I even had an hour-plus fitting session with my golf coach. I know my best length, lie angle, shaft stiffness, etc., but even after hitting about 200 balls with 10 different clubs from four different manufacturers (or maybe because of that), I still don’t know which set I’ll choose.

I have found that selecting a new golf club or set of clubs is a VERY SUBJECTIVE endeavor. And perhaps more importantly, because of the different swings, levels of development and goals of golfers, what’s perfect for one player is not the right fit for another. Sounds a lot like matching trading styles, systems and strategies to individual traders…

Here is the truth: there is no one best system, strategy or style. Van’s main thesis in his must-read book, Trade Your Way..., is that no Holy Grail in trading system exists. There is no one great system out there, hidden and secret and only discovered by the choice few. Instead, the Holy Grail of trading is finding a strategy or style that has an edge in the markets and that fits you. And so it is with golf clubs. And with stock screeners.

Like a good trading strategy, a good screener has to meet certain functional requirements. Here are some must have items:

• An export of results in a standard format (spreadsheet protocol).
• A very broad base of stocks (preferably the whole universe of stocks, but inclusion of all stocks from one or multiple exchanges or broad indexes is at least useful and won’t get you disqualified).
• Quick scans (in the last few years, this really hasn’t been a problem)
• Sufficient scanning criteria (filters) to make it useful.

Here are some nice items to have:

• Easy to use interface.
• Ability to save scans.
• Low or no-cost options.
• Ability to sort scans in the online results without having to export.
• Customizable or programmable scans.

The lists could go on, but you get the point. The importance of these individual items will vary from user to user.

So sadly, there is no “one best screener” for everyone. But next week we will start to dig into the details of the online low and no-cost screeners that offer some sort of technical scanning ability. 

Thanks to everyone who wrote in to give tell me which technical stock screeners you like. Some good ideas and points were made by almost everyone. Please send any suggestions/thoughts/reviews of your own to drbarton “at” iitm.com. Until next week…

Great Trading,
D. R.

About D.R. Barton, Jr.:  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".  

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