Tharp's Thoughts Weekly Newsletter (View On-Line)

• Workshops 2011 Winter Workshop Schedule
• Article October Market Update: Bull Normal by Van K. Tharp Ph.D.
• A Follow-Up from Van Going Farther Down the Rabbit Hole by Van K. Tharp
• Trading Tip Elections, Fed Meetings and Reports, Oh My! by D.R. Barton, Jr.
• VTI News!! Full-Time Research Assistant Position Available

Workshop

2011 Winter Workshop Schedule

Feature Article

Market Update for the Period ending November 1, 2010
Market Condition: Bull Normal

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, you may not find them useful. I find the market update information useful for my trading, so I do the work each month and am 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 US stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, 4) tracking the dollar, and 5) the strongest and weakest areas of the overall market.

Part I: Van's Commentary—The Big Picture

I thought I’d just make a few comments on what is going on in the United States.  It’s election week.  The media says that the markets will go up if Republicans take over Congress.  However, six corporations now control the U.S. Media and thus dominate the news and entertainment field and Americans now watch 153 hours of television per month.  With a 40 hour workweek, they should be working about 180 hours each month.  That’s almost a ratio of one hour of television to one hour of work.  Perhaps some watch television at work.  That’s pretty productive.

Almost no Americans are aware of the study published by the St. Louis Federal Reserve in 2006 that says the U.S. is bankrupt.  If you are aware of this study, it’s probably because of your association with the Van Tharp Institute.  How many of the following ten points are you aware of, if any?

1. The United States has lost approximately 42,400 factories since 2001.  About 75 percent of those factories employed over 500 people when they were still in operation. (Source: The American Prospect)
   
   
2. The United States once had the highest proportion of young adults with post-secondary degrees in the world. Today, the U.S. has fallen to 12th.  We still have strong universities, however, the top students tend to be foreigners. Once they graduate, the United States makes it very difficult for them to stay here.  Canada has almost exactly the opposite policy: if you get an education in Canada, you are encouraged to stay in the country and become a productive Canadian citizen.
   
   
3. In America today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services. (Source: Economy in Crisis)
   
   
4. The television manufacturing industry began in the United States. So how many televisions are manufactured in the United States today? According to Princeton University economist Alan S. Blinder, the grand total is zero.
   
   
5. If our trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone. (Source: Economic Policy Institute [PDF])
   
   
6. In the 2009 "prosperity index" published by the Legatum Institute, the United States was ranked as just the ninth most prosperous country in the world. That was down five places from 2008.  For many years the US was number one.
   
   
7. International job growth from 1999 to 2008, employment at the foreign affiliates of US parent companies, increased an astounding thirty percent to 10.1 million. Here is what actually happened: 
   
   International Job Growth = 30% to 10.1M = 233K Jobs
   Domestic Job Cuts =  8% decline from 21.1M = 184K Cuts
   Net Growth =  233K – 184K = 49K
   Net Percentage Growth = 49/(10.1M + 21.1M) = 0.16% Employment Growth.
    (Source: Tax Analysts [PDF])
   
   
8. The Census Bureau says 43.6 million Americans are now living in poverty, which is the highest number of poor Americans in the 51 years that records have been kept. (Source: Washington Post)
   
   
9. Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.  And Ron Paul, one of the few people who comments accurately on these things, was unable to convince the US Congress to audit the Federal Reserve.  The Federal Reserve has nothing to do with the U.S. Government.  Even though it prints our money, it is a privately owned institution.  And the policy of the people who created it was “let’s make sure we have a strong two party political system where everyone argues over trivial things and pays zero attention to what is happening to their wealth/money.”
   
   
10. Do you know what our biggest export is today? Waste paper.  Yes, trash is the number one thing that we ship out to the rest of the world as we voraciously blow our money on whatever the rest of the world wants to sell to us.

These ”facts” were listed among 35 in “Currency Wars” an article written by Gordon Long.  They are his “facts” but I included only ten that fit with my experience of what is going on.

As you will see in this update, now is a pretty good time to be fully invested—just not in the US, with the dollar’s decline.  The NASDQ 100 is up 16% so far this year and the U.S. dollar is down 18% since July.

Part II: The Current Stock Market Type Is Now Bull Normal

Each month I look at the SQN® of the daily percent changes over 200, 100, and 50 days.  On October 4th, the market volatility was neutral, which suggests no immediate bearish action.  Furthermore the volatility had declined significantly and the market type graph showed a trend moving toward bullishness.  This month, on November 1st the SQN 200 is neutral; the SQN 100 (our primary indicator) is bullish, and the SQN 50 is strong bullish.  Volatility is normal and the trends are all very strong.  Being close to fully invested at this point might not be a bad idea right now.

Fundamentals are still very weak.  We’re still in a secular bear market, but the market looks good, especially non-US aspects of the market as we’ll see when we look at the world model.  The overall trend of the model is quite clear: it’s up, and it’s been going up since early September.

You can see what’s going on just based on the recent trend.  This is part of what I mean by trading in the now—don’t let your internal chatter get in the way of letting the market tell you what’s happening.  We’ve had a few day reversals, but the market is clearly still in bullish territory.  (Incidentally, Excel draws the graph below and it always puts an extra vertical line at the edge of the chart.  Disregard that part of the line.) 

The next graph shows market volatility.  You can see that the trend has been towards lower and lower volatility since late May.  Now that can change quickly (e.g., April/May 2010) but volatility suggests nothing ominous approaching. 

Let's look at what's happening in the three major US indices. The next table shows the Dow, the S&P 500, and the NASDAQ over the past five weeks and over the last few years.  All three indices are up nicely for the year now with the NASDAQ 100 actually up 14%. 

The recent weekly changes, however, have not been very big; no weekly change for any index has been greater than 1% over the last two weeks.

Part III: The Strongest and Weakest Market Components

As I’ve mentioned over the last few months, I decided to use SQN® to measure the market performance of geographies, countries, currencies, and sectors in my world model.  I use the SQN 100, which calculates the SQN over the daily percent change of the various ETFs we follow over the last 100 days.  A score over +1.45 is very strongly bullish; a score below -0.7 is very weak.  I have kept the same color scheme:

• Green (strongest): Those that are more than one standard deviation above the mean (about 1/6 of the ETFs scanned).
• Yellow (the next strongest): Those above the mean up to one standard deviation (about 1/3 of the ETFs scanned).
• Brown (weak): Those below the mean and within one standard deviation (about 1/3 of ETFs scanned).
• Red (very weak): Those more than one standard deviation below the mean (about 1/6 of the ETFs scanned).

I removed all the leveraged funds from my database, which means that the top and bottom funds are devoted to the true strongest and weakest performers rather than to leveraged instruments.

Notice the huge change in the colors just in the last month: most of the chart is now green.  While I was in India last month, I noticed how well the Indian market was doing.  But this month it’s starting to look like the world over is great (except the US dollar).

And by the way, that last point is important.  The US dollar is very weak, which means that a slightly positive stock market is being offset by a very weak dollar.  Notice that the only negative currency ETF is the US dollar bullish ETF, UUP.

We have a number of countries with 100-day SQNs above 2.0 including Hong Kong, Chile, Thailand, Malaysia, and India.  Those countries show very strong uptrends over the past 100 days. 

There are only three negative ETFs on the entire chart: the US dollar bullish, homebuilders, and regional banks.  While US micro and small caps don’t look particularly good either, they don’t look awful.

The next table shows commodities, real estate, interest rate instruments, and the strongest and weakest areas of the overall market.  What’s interesting to me is that I’m seeing a positive SQN above 4 and a negative SQN (the US dollar bearish) below minus 2.  Both are extreme.

Notice all the areas above 2.  Every interest rate ETF, with the exception of the longest term treasuries, is strong.  Agriculture and silver are both very strong.  Real estate, except in the US, is strong. 

Most of the bottom performing funds on the list above are short funds.  This is an interesting picture in the market that I haven’t seen for quite some time and it’s happened quickly.  Cash is going into investments at a rapid pace everywhere with the exceptions of the U.S. dollar and U.S. markets.  So please pay attention to the big picture that we’re seeing.

Part IV: Our Four Star Inflation-Deflation Model

Inflation looks a little stronger this month.  

We'll now look at the two-month and six-month changes during the last six months to see what our readings have been.  These are the strongest results I’ve seen since I’ve been doing this.  That’s good for a country with the debt we have.

Shadowstats.com still calculates M3, which is the total money in circulation.  And M3 has been shrinking dramatically.  It bounced off -6% and is now at about -4%.  That means that total money has actually contracted 4% over the last 12 months.  That’s certainly not an inflationary sign.  However, inflation, as measured by calculating the CPI the way it was originally intended, is still at about 8%.  Unemployment, accurately calculated rather than the government way, is currently about 22%.
 
One positive note, however, is that the “real GDP” calculated using the real inflation numbers, is only at minus 1%.  This is the best reading since 2006.  Remember that John Williams’ real GDP figures have shown the US to be in a recession since 2000 with the exception of the 4th quarter in 2003.

Part V: Tracking the Dollar

The government didn’t have any data for Oct 2010 and they actually changed the Sept 10 figure to 74.99.  However, I’ve elected to keep last month’s original data there.  Since we have no new data, and I’ve already talked about the crash in the dollar from the world big picture perspective, all that’s left is to show you a U.S. dollar chart from Stockcharts.com.  I’m electing to show a weekly view here.

The chart shows nearly a 14% drop in the value of the dollar since May.  That’s certainly down a lot more than the U.S. stock market is up.  The bottom line is that the world market is strong and you should probably be fully invested, but not in things that are dollar related.  Invest in Forex (against the dollar), commodities, or foreign stock markets, anything but the U.S.

General Comments

We’re in a secular bear market.  This long term trend will means we'll see dramatic reductions in valuations, which will take the S&P 500 PE ratio into the single digits.  The fundamentals certainly support that trend now, even though in some secular bear markets the economy can actually be doing quite well. 

The next down phase looks like is has been put off; I don’t expect much in the way of down markets while we have normal volatility.  However, most of America has been fleeing to bonds that are paying miserable returns.  And suddenly the longer term treasuries are starting to look weak.  And as soon as rates start to go up, which they must at some point, another great bubble will burst and Americans will see more of their wealth disappear.  These markets are for trading only.

Most people spend years learning how to do their professional work.  Doesn’t it make sense to put the same kind of effort into learning to trade? 

Once again, it’s my opinion that you should use the information in these monthly updates to discern when to switch trading systems and not to forecast the market.  This is why it’s imperative that you know how your system will perform under various market conditions. If you haven't heard this before or the other ideas mentioned above, read my book Super Trader, which covers these areas and more so you can make money in any kind of market.

Crisis always implies opportunity. Those with good trading skills can make money in this market—a lot of money. There were lots of good opportunities in 2009. Did you make money? If not, then do you understand why not? The refinement of good trading skills doesn't just happen by opening an account and adding money. You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Financial market trading is an arena filled with world class competition. Additionally and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment, and the right training. Until the July update, this is Van Tharp.

About the Author: 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.  

More from Van Tharp's Article Last Week

Going Farther Down the Rabbit Hole

This is a continuation of one of the ideas introduced in last week’s article, Van Tharp’s Adventures Down the Rabbit Hole. 

I’d like to invite you to join me in my adventures next weekend (November 13-14) by participating in a two-day Oneness Awakening Workshop.

This extremely powerful psychological workshop includes the following:

Click here for Down The Rabbit Hole, Part Two

Trading Tip

by D.R. Barton, Jr.

Looks like there is a perfect storm brewing that could flood us out of the market’s recent volatility contraction.

The market’s daily range, a good proxy for volatility, currently sits at a very rarely reached level.  It’s time to break out of this tight trading range and we have three “external” events that will almost ensure that the market’s sideways run is over.

First, US voters swept in a big change in Washington with Tuesday’s election results, granting Republicans firm control of the House and reducing the Democrat’s hold on the Senate to a small sliver.

Second, the Federal Open Market Committee (FOMC) makes its statement Wednesday at 2:15 EDT.  There is a general consensus that the Fed will make a significant statement about round two of quantitative easing, which has been dubbed QE2 in the press.   Some pundits claim that the market has already anticipated such a statement.  They would claim that QE2, combined with the supposition of a more business-friendly Republican congress, has been the fuel for the run up in the equities markets since early September. 

Even if the markets have already priced another round of quantitative easing into the indexes, a strong QE2 pronouncement will surely provide at least a short term pop.

Finally, the monthly employment numbers come out before the markets open on Friday morning.  This has been THE key market moving economic number as of late and this Friday’s numbers should be no exception.

What Goes Down Must Come Up

Volatility is cyclical: expansions always follow contractions and big expansions follow tight contractions.  Given the level of the recent contraction, this expansion could be a doozy if either or both of the Fed’s and employment announcements come as a surprise.  Let’s look at a chart of the S&P 500 cash index. 

 
You can see the volatility contraction by looking at the indicator at the bottom—the Average True Range.  This shows the average daily range of the last five bars, taking into account any gaps.  As you can see, our current level is below about 95% of the data on that chart.  Volatility has contracted to a relatively low extreme. 

Wednesday’s early trading kept within a trading range, which tells us that the election results from Tuesday (Republicans win the House but not the Senate) were already priced in.

The Fed announcement on Wednesday afternoon, however, most likely WILL add some volatility.  And it is highly likely that the employment numbers on Friday will once again give the market a jolt, one way or the other.

Next week we return to our series on the examination of the details of the Flash Crash.  We’ll look at the consolidated quote system and how the interlinked pricing networks for the futures, stocks, and options markets contributed to the data delays on that fateful day in early May. 

I’d love to hear your thoughts and feedback on this series or about trading and investing in general at drbarton “at” iitm.com.  Until next week…

Great Trading,
D. R.

About the Author: 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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This position will pay $25K/year and include enrollment into Van Tharp’s Super Trader Program, which you would complete on your free time over a 2-year period.

You must fit the criteria required for admittance into the Super Trader program to be considered for this job. This includes completing the Peak Performance 101 workshop and an interview with Van regarding your commitment to the Super Trader program. 

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