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. If you are inclined to go through some sort of intellectual exercise to prove one of my beliefs wrong, simply remember that everyone can find 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.
The table above shows the massive changes in market direction we’ve had in the last month.
Notice that the federal debt increased from $21.9 trillion in Dec 2018 to $23.39 trillion at the end of last month and now it’s at $23.62T. Also notice that Federal Spending is about $1.46 trillion more than the income and that will get much worse. Suddenly the unofficial debt of the US Government went from 128.4 trillion to $135.8 trillion. That’s an increase of $10 trillion in a month – which probably means they are counting the current bailout package.
I remember thinking the end of the world was coming when our total official debt hit one trillion after taking many years to get there. Now we grow the debt by more than a trillion dollars in a year. I’m not sure there is an unsustainable deficit level but we have to be close. And that’s what I said last month. This year I expect the Federal Deficit to grow to $30 trillion. That should mean massive inflation which will wipe out debt and people’s savings. But who knows what else the government will do – perhaps it will issue a new currency or take some other drastic measure.
Part II: The Current Stock Market Type Is Bear Very Volatile.
I monitor the Market SQN for timeframes from 5 weekly bars to 40 weekly bars. Look at the price chart pattern and you can probably tell the direction for each of the periods –
- 200 days – Bear in March, Strong Bear now.
- 100 days – Bear last month, Bear now.
- 50 days – Strong Bear last month, Strong Bear again.
- 25 days –Strong
- Bear last month, now it ’s just Bear because of last week’s rally.
So now all of our measured periods are either Bear or Strong Bear.
Let’s take a look at the weekly bar chart below for the S&P 500. You can clearly see the uptrend for 2019 and that we made another new all-time high in mid-February. You can also see the tremendous downward movement over the last month and then the formation of a very volatile base at the bottom. The question now is will the Fed’s unlimited bailout make that the bottom or have we seen just the beginning of something that’s very nasty – or a great opportunity for traders who know what they are doing.
The next chart shows the volatility measurement for the last twelve months.
The last chart below shows the extreme changes in the market type direction which occurred quite suddenly – the fastest I have ever seen.
The next table shows the weekly changes for the three major stock indices for the last month. Here is what I said two months ago:
“If you had been fully invested from the beginning of 2019, then you’d be up 22% in the DOW, up 23% in the S&P 500 and up almost 38% in the NASDAQ 100. Two Dow stocks, Apple and Microsoft, were up 86% and 55%, respectively accounting for a lot of the DOW move this year.”
From the start of 2020, now the Dow is down 23%, the S&P is down 20%, the NASDAQ is down over 10%, and the Russell 2000 is down about 31%. Each of those indexes would be about 10 percentage points worse if it weren’t for the huge federal stimulus package rally last week.
Part III: Our Four-Star Inflation-Deflation Model The model had mixed results in March.
All of our measures fell in price substantially last month except for gold. We’re neutral again between inflation and deflation, however, that could indicate either serious inflation or serious deflation resulting from what’s going on right now. The odds probably favor inflation because the government cannot afford its debts but it can inflate the debt out of existence and then you are the one paying the bill for the government’s stupidity.
Shadowstats.com still shows the inflation rate (as it was originally conceived in 1980) as being around 10%. Adjusting the GDP by the original inflation calculation suggests that we have been in a recession since 2000 with just one quarter of non-recession. These figures seldom change much. Right now Shadowstats has the GDP at -2%.
Part IV: Tracking the Dollar
This month I’m going to show two USD charts – February and March. USD closed February at 98.51 – up on the month – and then went much higher in March but is now off of its highs.
The next chart shows the current data. On April 1st the dollar is at 99.65 up a little from the close last month at 98.51
The market looks crazy to me. We’ve had a worldwide crash over COVID-19. And right now much of the world is in lockdown. We are seeing massive government stimulation programs which should result in inflation in almost every currency.
What’s interesting is how many different interpretations there are about how this will play out and what caused it. Let’s start out with predictions. One epidemiologist said that this doesn’t really go away until about 70% of the population is immune – either from contracting it or receiving a vaccine. No vaccine will be available for about a year.
This same epidemiologist said that a total worldwide quarantine for about a month would probably take care of it as well. But that’s not what we are doing in our lockdown with social distancing. So the second scenario is we have about two months of lockdown and then things go back to normal, and then we have another lockdown. And this repeats itself until a vaccine is developed and is widely available.
What caused it is ever more interesting and the stories are rampant.
Story 1: Coronavirus comes from bats so someone in China ate some infected bats and caught the virus.
Story 2: This is the Chinese government version and was echoed by one of our Chinese friends who lives in Shanghai – foreign businessmen brought the virus to China.
Story 3: The virus was engineered in a Chinese lab looking to develop biological weapons . . . and they found one.
This is all fiction to me – as are all beliefs, however, stories 1 and 3 are possibly the most believable for me.
It’s also clear that the places where COVID-19 is most under control have done two things.
- They have done massive testing, and
- They immediately traced the source of every infection and isolated it. The South Koreans have also done a good job of this.
Great Britain, on the other hand, chose a path of letting the virus sweep through the population and do its thing. Britain’s population is about 66.4 million people so if about 70% catch it and 10% of those are severe cases that require hospitalization, then the UK has to deal with 4.6 million people requiring hospitalization. The problem? The UK has only 167,600 hospital beds which means that 4 million people could die plus other people who would normally have survived some other illness won’t because of the lack of beds. Both the Prime Minister and the future king (Prince Charles) have been diagnosed with COVID-19.
Our purpose here is not to predict but to merely reflect on what is happening. Be careful you are not paying attention only to what you expect to happen. Stay in the know! Pay attention to what is happening right now.
Obviously I’m not in South Africa. That trip was canceled when South Africa closed its borders to US Citizens about a day before I was to leave. I guess the good news is that my Safari would be over now but I can still look forward to the whole trip whenever I get to do it.
Finding the Holy Grail of Trading
Five weeks ago, I finished teaching my new workshop – Trading Genius II: System Thinking. I don’t think I’ve ever taught a workshop before where I have talked so much, however, I really want to drive home how we now think about trading systems. I have the belief that you don’t trade the markets, you trade your beliefs about the markets. Your beliefs about yourself, the market, and your trading systems are not real but hopefully, they are useful.
In the Trading Genius II workshop, I explained a new way to evaluate trading systems which I call the Beyond the Matrix Thinking Format (BTMT). In creating this course, I developed this new method which has totally transformed my ideas about trading systems. In the workshop, I provided about six examples of applying the BTMT process and the huge effects it had on several trading systems. I’m not sure that people watching the live stream fully understood the impact of this new way of evaluating systems. As a result, I have decided to present a one-day Trading Genius II follow-up workshop sometime around the end of September. Between now and then, we will have a trading contest based on the application of the BTMT method. At the late September follow-up workshop, we will discuss how the BTMT method helped the top five winners of the contest. Yes, there will be meaningful prizes for the winners.
Anyone who was in the Trading Genius II workshop (or who enrolls soon – see below) is eligible for the contest provided they submit an approved BTMT format for their system before they start trading. The window for trading begins in mid-March. Later registrants can start trading after submitting their BTMT format though the contest period for everyone will end mid-September.
Also, it’ll be a great time to do the contest as the market type could be changing (or not).
I won’t start that contest until I have entries from at least 30% of the people registered in that workshop. Thus, you still have time to sign up and watch the videos and submit an entry. I really want you to get how this awareness level really is the Holy Grail of trading.
Also on April 8th, we’ll be starting a new weekly course, From Crisis to Success and Happiness. This course will take the place of Infinite Wealth. You can learn more about it HERE.