January 2022 Market Update Sideways 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. However, if your beliefs are not similar to mine, 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 is wrong, simply remember that everyone can usually find lots of evidence to support their beliefs and refute others. 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.

Part I: The Big Picture

We currently have inflation. We have a Federal Reserve that plans to stop the qualitative easing process and a stock market that could crash as a result. The president’s approval rating is low because he hasn’t been able to get much of his agenda through Congress. But the Democrats just have a majority, and they are very fractured – much more so than the Republicans.

Much of the inflation problem has to do with a backlog of materials sitting in our ports that cannot get out. For example, there is a huge inflation in the price of lumber, but much of that has to do with lumber sitting in the ports. My framer said that sometimes he has to wait a year to get certain frames and they’ve gone up a huge amount. So, the Fed wants to fight that. Can it, if much of it is due to a transportation and storage problem? I doubt it.

Also, the pandemic is by no means over. Biden is urging people to get vaccinated rather than re-impose restrictions on people’s activities. All of this means that perhaps the Fed will still need to stimulate the economy.

US Debt Clock

The following table shows the information that we track regularly on the US Debt Clock website.

The numbers are so large, and the trends are so persistent that it takes some effort to focus on what they say – beyond “Our debt is huge”.

The table below tracks bankruptcies, foreclosures, and employment figures. The prohibition on evictions will end shortly so foreclosures and bankruptcies could go up in the coming months.

The next table tracks money supply figures, credit card debt, and the number of millionaires. The number that might jump out for you among these tables, based on the website www.usdebtclock.org, is one figure that dwarfs all of the others – derivatives. Interesting but should it be concerning?

Part II: The Current Stock Market Type Is Sideways Normal

Van monitors the Market SQN for timeframes from 5 weekly bars to 40 weekly bars. Looking at the S&P chart just below, it’s not too hard to tell which market type dominates all four time periods.

  • 200 days – Strong Bull in December, now Bull
  • 100 days – Bull last month, now Neutral/Sideways
  • 50 days – Strong Bull last month, now Bear
  • 25 days – Strong Bull last month, and now Strong Bear

You can see that all time frames got quite bearish. We’ve had a slight bounce so perhaps it’s just a short-term correction.

For the same time period as the chart above, the chart below shows the Market SQN score. We see Strong Bull for almost the whole of the last year, except for a few forays into bull territory, and now it’s neutral.

The final chart shows volatility for the last twelve months using the ATR%. For the last year, volatility has spent the period in a long-term trend of decreasing volatility mostly in the Normal and Quiet ranges.

We were in Normal for most of December with a slight move into volatile. However, this month we’ve moved into volatile.

The next table shows the four major exchanges of the year. Two important points here. First, inflation was well over 6 last year. Second, all of the averages are down this year from minus 3.32 for the down to almost 10% for small caps.

Part III: Tracking Inflation

For all of the recent talk about inflation and whether it proves to be transitory or not, let’s see if the numbers tell us we are seeing inflation now.

The following table shows our proprietary inflation model that now includes BTC. We may take gold out because it’s no longer what most people are using as an inflation model.

Our model is showing inflation but I’m really beginning to think that gold doesn’t belong on the index anymore and I will take it out if that continues this year.

Our model has clearly started to signal deflation, but perhaps that is just an anticipation of rising interest rates. I certainly believe that we have inflation and that’s because of the lack of availability of goods that are needed. For example. I want a new shower. A new shower takes a day to install but was told it would take four months to get the supplies.

Part IV: Tracking the Dollar

USD has been slowly going up since the end of May and as of the open on January 1st it was $95.97. It was 96.26 at the close on January 31st.

For most readers, the US Dollar is your base currency. As there is some lag between monetary and fiscal policies, early signs of inflation may be showing up with much more to come.

Congress, Biden, and the Fed have increased spending dramatically which has short-term and longer-term effects. What will you do if inflation continues or increases?

Conclusion

Right now, we are in a sideways market. There are strategies for trading in a sideways market and now is a great time to understand those (we do have a workshop on this topic), but other than that there isn’t much to do. However, I want to mention that there is a new megatrend the metaverse, and rise In NFTs, especially for artists and musicians.

I was just given a recommendation for a set of NFTs, and I actually bought one. The artist put out about 2,000 different pictures. He’s famous and has had NFTs go for over a million. The ones I had to choose from were all about 1 ETHE (or $2,600) although one person was asking for almost a million for one of the ones he’d bought. But what I also noticed was that the artist gets a 10% royalty every time one is sold.

Let’s see. 2,000 NFTs at $2,500 = $5,000,000. Then, you get 10% more every time one is resold. I think that’s financial freedom.

Until next month, this is Van Tharp.

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