NEW

 The Van Tharp Institute Introduces the 2nd Edition of the Peak Performance Home Study Course!

It has been nearly fifteen years since I made any significant changes to the Peak Performance Home Study Course. During that time, I have researched and learned a lot more about important topics for trader peak performance, and I want to share this knowledge with you. I have spent much of last year working on a new edition of the course. Today, we are introducing the new 2nd Edition of the Peak Performance Course.

First and simply, everything has been modernized and updated. Market examples and real world references are from today rather than the early 1990s. 

Second, there are numerous new ideas, theories, and practical exercises to help you become a more successful trader. 

Third, I estimate that I revised more than 20% of the existing content of the five volumes. 

Of all the additions and revisions, I think these are the most noteworthy improvements:

• Four entirely new chapters.

• Major changes to other chapters amounting to about 16K words of additional, new material.

• Two new daily tasks of trading.

Feature

Market Update for Week Ending June 26, 2009
Market Condition: Volatile Bull

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 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

I recently saw some interesting comparisons. If you look at large cap stocks on the NYSE and calculate the compounded return over 10 years, there have only been three rolling 10 year windows in which the return was negative:

• 1929 to 1938—minus 0.8% compounded annual return
• 1930 to 1939—minus 0.5% compounded annual return
• 1999 to 2008—minus 1.38% compounded annual return 

This started at the beginning of 1999, which was a huge up year so 2000 through 2009 will be interesting to observe at the end of the year. 2000 definitely started the secular bear market that I’ve been talking about for some time.

USA Today came out with some interesting information on Monday. They listed 10 stocks that had doubled this year; however, 7 of them were below $10 per share. In addition, they listed ten stocks with market caps over $10 billion at the end of 1999 that had declined at least 98% as of June 29th. These included AIG, Fannie Mae, GM, Freddie Mac, Level 3 Comm., Washington Mutual, Calypte Biomedica, Conexant Systems, XO Holdings, and Lehman Brothers.

In addition, Rolling Stone came out with an interesting article in which they blame a lot of bubbles and crashes on Goldman Sachs. And the link to the government is very interesting:

• George Bush’s last Secretary of the Treasury was a former CEO of Goldman.
• Bill Clinton’s Secretary of the Treasury, Robert Rubin, spend 26 years at Goldman before becoming Chairman of Citigroup and they got 300 billion from Paulson.
• Goldman employees paid nearly $1 million to elect Obama.

And the list goes on and on with links to Goldman. If you have a former link to Goldman your company stands in line for a bill bailout. The article is all over the Internet, but here is one link.

Part II: The Current Stock Market Type Is Volatile Bull

We have had some nice up movement in the market and S&P 500 is now a little higher than it was at the close of the year. Since this recovery has been rapid, it’s turning into a nice bull correction. We are now using the new market type as explained in the articles from the last two weeks. However, the old reading is the same: volatile bull. I’d be much more comfortable with quiet bull or a normal bull market.

The 20 day ATR as a percentage of the close is now under 2, which hasn’t happened in some time. Notice that both the 100- and 25-day SQN™ are above 0.3, which indicates that both are bullish by our definition.

If you missed the articles on market type they’ll be available in the back issues of Tharp’s Thoughts until the end of the month. After that they’ll only be available as a special report.

The following chart shows the 100 day SQN™ readings since 2008 along with the price of the S&P 500. If bullish is defined as above +0.3, you’ll notice how little time we’ve spent in bullish territory.

Notice that when it gave an extremely bearish reading of almost minus 2.0, the S&P 500 fell over 200 points. From the low to now the SQN has been gradually moving up to where it now gives a bullish reading. Also notice that the right side, which gives the SQN readings, goes from -2.50 to +1.0, so it is not symmetrical at all. Let’s look at the next chart of the 25 day SQN.

Notice that right at the bottom of the market the 25 day went from hugely bearish to hugely bullish in a few weeks. And it’s been in a downturn since then (although still in bullish territory). Notice that the 25 day SQN has been extremely bullish twice: Once at a market top, and the second time shortly after the market bottom this year.

Let’s look at what’s happening in the three major U.S. indices. The next table shows the Dow, the S&P 500, and the NASDAQ over the past five weeks.

The Dow is still down on the year, but it has lost Citi and GM, and like a mutual fund, it is now a whole new index. GM no longer represents America…. or does it? GE, the oldest member of the DOW, is the worst performing member in 2009 of the remaining members of the index.

Okay, so we are now classifying the market as bullish. A trader could have made a lot of money in these markets—both on the upside and the downside—and we teach people how to do that. But if you consider yourself an average investor (and you should know my thoughts on that by now), does this look like the end of the secular bear market? And is this the market you want to enter in to with your life savings to hold for a long period of time?

If you’d really like to know what’s going on in the last up move, which seems violent and extreme, then I suggest that you listen to this clip from CNBC. Here you’ll hear a floor trader talking about extreme market manipulation and what’s really going on in today’s market. 

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. The next one will be held for the first time ever outside of the US in Berlin, Germany. Ken explains how these numbers are derived in this workshop. You can sign up for it here. Ken covers numerous systems that have System Quality Numbers above 5.

Click for larger view

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 out all the double leveraged funds from 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. The strongest areas here are India, China, Hong Kong, Chile, Spain, and Sweden.

The weakest areas are Oil and Gas Exploration, Oil and Gas Equipment, Russia, Energy, Aerospace, Emerging Europe, and the Canadian and US Dollars.

The next chart shows the commodities, real estate, bonds and the strongest and weakest sectors.

The two strongest areas are both Asian real estate funds, but RAP was ranked so high that I had to eliminate it from the data because of a possible data error. India was huge. The weakest funds tend to be oil, gas and regional banking and US real estate. Also the Templeton Russian fund has gone from way on top to one of the bottom funds very quickly.

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.

We are exactly where we were last month with the inflation measure at +3.5 suggesting the probability of strong inflation.

Part V: Tracking the Dollar

The dollar is continuing its uptrend because of deleveraging.

Undoubtedly, the dollar, which showed up very weak in our world model, is turning down now. It’s now at the lowest it has been since September ‘08. It wouldn’t surprise me to see it at last July’s level when I arrive in Germany.  I expect Tharp’s law will be in effect again: Van travels and the dollar goes down. 

General Comments

Crisis always implies opportunity. Anyone with trading skills can make money in this market, but you need the training and self-work to do so. Right now we are in a manipulated bull market. 

I finally sold a piece of real estate in Memphis. And I’m mentioning this because I now have first hand evidence that the subprime crisis is being created all over again. Memphis real estate is clearly in a downturn, but first time buyers are eager to get their dream home. Why? Because the Obama administration has given them a sweet deal. First, interest rates are relatively low. Second, the Federal Housing Administration is allowing people to buy with a down payment of 3.5%. Third, the government is paying first time home buyers $8,000 to buy a house.

So let’s look at my transaction as an example of what is happening. The house I sold cost $96,000. I sold it for $86,500, which was slightly less than my mortgage balance. However, I had to pay commissions, all fix up costs demanded by the lending agent, plus ALL of the buyer’s closing fees. In other words I had to write checks totaling about $18,000 to sell the property. And that amount only included checks written in the last month. The buyer had to write a check for $3,027 to buy a property that is declining in value that she could not afford to sell unless it goes up substantially in value. Not only that, I had to wait two weeks beyond the expected closing date because she had to get her down payment out of her 401K plan. However, with the $8,000 check, this buyer was essentially getting paid $5,000 by the government to get me out of a declining asset.

So what are the long term prospects for this buyer (and remember there are probably many of them all over the country)?  As I see it, there are two possibilities. First, she cannot afford to sell because she doesn’t have the $18,000 that it would cost her to sell it to someone else. Second, she could be okay if she is able to maintain her house payments for a long time and live there comfortably until real estate prices climb dramatically. If we have hyperinflation, she will do quite well with her house. Or third, she suddenly cannot make her payments (very likely scenario) and the government is stuck with another default. That’s what is going on with American real estate under the Obama stimulus plan. 

Several of you have asked for a market type analysis on other markets. As a result, in two weeks, I’ll give you a market type analysis for Australia and Germany. I’ll do an in depth analysis of two new markets each month and continue the update of those already covered. Other possible markets to cover might be China, Oil, the US dollar, and commodities. We’ll be using the 100 day SQN and the ETF data for those markets. I’m willing to cover as many as 10, so if you have a burning desire to see some other market, let us know. If there is enough interest, and we have an ETF that tracks it with at least two years worth of data, then I’ll include it. 

I haven’t listed Gold, because Florian Grummes has given us permission to reprint his gold analysis (which is pretty thorough) once each month and we'll do so in another issue. 

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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Trading Tip

The Golden Cross: Rare and Useful but Overexposed?

by
D.R. Barton, Jr.

Few technical indicators have been more discussed in the past couple of weeks than the fabled cross of the 50 day simple moving average (SMA) above the 200 day simple moving average in the S&P 500 cash index.

This is the legendary “golden cross”, a most bullish of signs for long term trend followers. And one occurred at the market close last Tuesday (6/23/2009). The last time this happened was in September of 2006. Here is a chart that shows these last two occurrences.

It’s hard to imagine a more broadly recognized technical indicator. I entered four words into Google—golden, cross, moving, average—and got 2.1 million results.

I have to be honest: I didn’t have time to read through all of them.

But the ones I did peruse yielded some interesting comments. As with most technical analysis concepts, there were folks around with an ax to grind. The efficient market crowd was out in force yearning to prove that there is no edge in the market. Tech analysts added in their favorite filter to show (in hindsight) what would have worked.

But the more balanced research pieces provided some useful insights. 

The Overview

In general the 50 / 200 cross provides a moderate statistical edge over buy and hold. If one models an always-in-the-market strategy of buying an index when the 50 SMA is above the 200 and reversing to go short when the 50 drops below the 200 (a signal known as the death cross or the black cross), one gets the normal results of most long term following strategies: a positive edge from a system that does well in trending times and then gets whipsawed in sideways markets.

Some of the most useful studies I saw showed the following:

• The only study I found that entered on the golden cross and went flat on the death cross signal showed a clear advantage for all stocks and indexes except ones like Apple, which had a clear upward move through the 10 year test period. The most interesting thing said in this research piece was that timing methods worked better in most periods than buy and hold, except for markets that are in a strong uptrend for an extended period. For any stock or index that showed a deep drop during the test period, the “buy golden crosses and go flat on death crosses” method outperformed buy and hold by a very significant margin.
• A friend and very serious researcher looked at an always-in-the-market version of the strategy from 1981 through the present using S&P 500 cash index. The method returned more than 10% per year annualized and showed only 20 total changes in direction during this 28 year period.
• Another interesting but less reliable study looked at only golden crosses back to 1929 using Dow Jones 30 cash index data. They added a filter, which reviewed just the signals that occurred during a recession. There have been 14 since 1929, and 13 have produced positive gains when closed out one calendar year later. This study has too few data points to be statistically significant, but it does show a glimpse of why so many people keep their eye on this indicator.

So should we run out and load up on the long side of the market now, based on this signal? I think the body of evidence supports the usefulness of the indicator, and those who have a long bias will find that more than a few institutions out there will be changing their portfolio balance based on the signal.

The competing argument is that the current market is already overbought based on the rise off of the March 9th bottom and that the fundamental and economic picture still favors the bearish side for quite some time.

For me, the overarching factor in the markets today is all of the cash that has been injected into the market by the U.S. and other central banks. With that unprecedented bankroll, this bullish party can last for quite some time. It certainly has lasted long enough for the fairly rare golden cross to show up.  Knowing all that excess money is out there chasing after a home, I can’t get too bearish until the market really shows some downward momentum. But because of the monstrous amounts of artificial capital stimulus, when its effect starts to run out and the next breakdown happens, it could be a whopper.

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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