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
December 2018 officially went on record as the worst December for the stock market since the great depression. And December made the indexes everything negative for the year. The market type is now Strong Bear Volatile. We haven’t officially reached the 20% decline that those who make official records of a bear market — but here’s how close we are. The last all-time high close in the S&P 500 was on September 20th at 2930.75. On Christmas Eve, our bear market low close to date was 2351.10 — down 19.77%. And I’m sure if you used the intraday high and low, we probably hit a 20% decline. Right now the last S&P 500 close for the year was 2506.85 — down 14.46% from the high close in September.
Recently, www.usdebtclock.org started listing US Assets. US assets (includes small business assets, corporate assets, and household assets) total $149.2 trillion. But then consider that our unfunded liabilities are $115.7 trillion. The total liability per taxpayer is $947,788 and the total assets per citizen is $453,436. The trend towards higher debt has been going on for years and thus is likely to continue. But one day it will all collapse. And by the way, the asset amount has decreased significantly over the past few months as the stock market has crashed.
The people supported by the 122.2 million taxpayers include retirees, (52.6M) disabled people (10.2M), those getting food stamps (38.1M) or 100.9 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 82.7%
Part II: The Current Stock Market Type Is Strong Bear Volatile
The Market SQN scores for the various periods we monitor look like this for November and December —
- 200 days – Bear last month, now Bear
- 100 days – Bear last month, now Strong Bear
- 50 days – Strong Bear last month, now Strong Bear
- 25 days – Strong Bear last month, now Bear (as of the last 3 up days in the month)
All periods at the end of December were Bear or worse. This is a very dangerous market. But it’s a great market for traders who know how to operate when there is a lot of volatility.
The chart below shows the weekly performance for the last year as of the end of December. You can see the huge weekly bars at the end. 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 signal (rate inversion) for a recession to actually occur. The Fed had been promising four more rate hikes (3 in 2019, and 1 in 2020) but now they seem to be softening their stance to perhaps two more in 2019.
The chart below shows what then happened to the Market SQN score (100 days) in December. As you can see it was in bear territory for November and the beginning of December but has now moved into strong bear territory.
The last chart shows the market volatility. You can see that it has been in the Volatile range for most of the time since late October and really shot up in late December.
Lastly here are the weekly changes for the three major stock indices for 2018.
So as of December 31, the last trading day of the year, all three major markets indexes were down for the year. They were up pretty significantly as recently as September.
Part III: Our Four-Star Inflation-Deflation Model
The four components of the model were mixed for the two timeframe measures in December —
In contrast to my model’s results, 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.
Our model shows pretty neutral inflation scores overall for 2018 but the Fed is raising interest rates because it theoretically sees inflation approaching. The Federal Reserve is a privately owned entity and the large banks control its board of governors. My guess is that the large banks do not want Trump re-elected in 2020 and rate increases are a way of making sure his tax cuts don’t cause a stock market boom by the time he starts to run for re-election.
Part IV: Tracking the Dollar
As interest rates continue to rise, we still have tough tariff talk. Both of these factors seem to support a quite strong US Dollar compared with other currencies. USD has been consolidating recently at a strong level and it is still close to its yearly high.
As I have mentioned, one newsletter writer gave a webinar about two months ago for more than 100,000 people telling them that we are nowhere near a market bottom. This occurred around the October crash. 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 his advice subjected 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 leveraged ETFs because of their daily price recalculations even when you are correct about the market direction. At this point, all the triple leveraged ETFs have been stopped out and the portfolio is only holding half of its original positions.
Is there a market melt-up coming? Perhaps — but why not let the market prove itself first? Until the market is actually going up, why expose yourself to anything like 45% portfolio heat? Right now the market direction is STRONG 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.