October 2018 Market Update: Bear Volatile Market Type

By Van K. Tharp, PhD

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. 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. If your beliefs are not similar to mine, however, then this information may not be useful to you. Thus, if you are inclined to go through 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. 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 which allows us to get the closing data from the previous month. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp’s Thoughts), 2) the debt statistics for the US, 3) the five-week status on each of the major US stock market indices, 4) our four-star inflation-deflation model, and 5) tracking the US dollar. I also write a report on the strongest and weakest areas of the overall market as a separate SQN™ Report. Significant market changes may mean the SQN Report comes out more than once a month.

Part I: The Big Picture

The market type change in October may have been the biggest one month change I have ever seen. The market went from Strong Bull Quiet at the end of September to Bear Volatile at the end of October.

US Debt Clock


For the past four months, www.usdebtclock.org has listed US Assets. US assets include small business assets, corporate assets, and household assets which all total $149.9 trillion. But then consider that our unfunded liabilities are $115.3 trillion. The total liability per taxpayer is $945,220 and the total assets per citizen is $455,728. The trend towards higher debt has been going on for years and thus is likely to continue. But one day it will all collapse.

The people supported by the 122 million taxpayers include retirees, (52.6M) disabled people (10.3 M), those getting food stamps (38.4M) or 101.4 million people. This is one trend that has been going down during the Trump years. In January 2018 it was 89.5% but now is 83.0%

Part II: The Current Stock Market Type Is Bear Volatile

October’s directional component shift for the market type was very interesting. The Market SQN scores for the various periods we monitor look like this for September and October —

200 days – Bull (last month), now Bear
100 days – Strong Bull (last month), now Bear
50 days – Bull (last month) now Strong Bear
25 days – Bull (last month), now Strong Bear

All periods at the end of September were Bull or better. Now they are all Bear or worse. This is a very dangerous market.

The chart below shows the weekly performance for the last year as of the end of September —

Now here’s the new chart including October’s weekly bars —

Look at the change in the size of the weekly bars and see how much of a drop occurred in a single month. This is despite the huge up move yesterday, October 31. The Fed is raising short term rates and with the last rate hike, we are near (or at) a rate inversion. This is a sign of an upcoming recession, however, it takes a year from that sign for a recession to hit. The Fed has promised five more rate hikes (Dec 2018, 3 in 2019, and 1 in 2020).

Here’s the Market SQN chart showing the score in the Strong Bull range at the end of September:

The chart below shows what then happened to the Market SQN score in October —

And finally let’s compare volatility at the end of last month . . .

. . . with the big jump in market volatility in October —

Lastly here are the weekly changes for the three major stock indices for 2018.

Both the Dow 30 and the S&P 500 are now down on the year, while the NASDAQ is still up 7% on the year.

Part III: Our Four-Star Inflation-Deflation Model

Materials and financials were lower in both of the model timeframes in October but those trends have opposite meanings — cheaper materials point to deflation while cheaper financials indicate inflation. The other model components were mixed for the model timeframes.


The Fed is raising interest rates because it sees inflation approaching but our results show deflation in three of the last four months and pretty neutral scores overall for 2018. In contrast, www.shadowstats.com measures inflation the way the government measured it in 1980 and shows inflation at about 10% right now. And on that basis, we have been in a recession since 2000 except for one quarter in 2003. How do the results of this model relate to the relative value of the US Dollar? See the next section of this article and the SQN Report below.

Part IV: Tracking the Dollar

We have tough tariff talk and rising interest rates. Both of those factors seem to support a quite strong US Dollar compared with other currencies. It dropped a little in September and then rose again with the recent rate hike. Now, it’s at a yearly high.

Conclusion

The stock market took a huge tumble in October. At the beginning of the month my ego gave me a warning sign because I noticed I was very proud of my recent trading performance. And then suddenly the market goes down 1%, down 2%, down 1% and moves like this for about a week until most of my profits from the last two months were gone. I was about to leave for our London workshops where I would have little time to look at the markets so I went to about 75% cash. And that prevented a disaster. I’m still largely cash.

In the meantime, one newsletter writer just gave a webinar for more than 100,000 people telling them that we are nowhere near a market bottom. He proposed that his subscribers buy a portfolio of nine stocks and ETFs to take advantage of huge gains yet to be made in the market. What’s interesting is that he had 35% trailing stops on 6 of the positions, 50% trailing stops on 2 others and no stop on the final recommendation. Subscribers who followed this advice are going to subject themselves to a portfolio heat of 45%. What’s more, two of his recommendations were triple leveraged ETFs. Such instruments are very dangerous to hold over the long term because of their daily price recalculations. You can lose money on those positions because of the daily price fluctuations even though you are correct about the market direction.

Now this newsletter writer’s market predictions about the market may happen but taking on portfolio heat of 45% is a huge risk for anyone. Why not let the market prove itself first? Right now the market direction is Bear and volatility has reached the Volatile range. This is not a good place to be long.

Until next month’s Market Update, this is Van Tharp.

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