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 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 big picture remains COVID-19, cheap oil because of a price war, and massive government bailouts. The S&P 500 has recovered more than half of its drop into the late March low even though the economy has recovered nowhere near its previous levels.
Notice that the federal debt increased from $21.9 trillion in December 2019 to $25.71 trillion at the end of last month. That’s an increase of $3 trillion in five months. Also, notice that federal spending is about $2.6 trillion more than federal income and that will get much worse. Suddenly the unofficial debt of the US Government went from $128.4 trillion to $147.8 trillion. That’s an increase of nearly $10 trillion in two months — which probably means the site is counting the current bailout package.
Part II: The Current Stock Market Type Is Bear Volatile
I monitor the Market SQN for timeframes from 5 weekly bars to 40 weekly bars and here are the various market type directions
- 200 days – Neutral at the end of April, Neutral now
- 100 days – Bear last month, Bear again
- 50 days – Strong Bear last month, Bull now
- 25 days – Bull last month, and still Bull
So now our measured periods range from Bear to Bull.
Let’s take a look at the weekly bar chart below for the S&P 500. The question is will the Fed’s unlimited bailout make that the bottom. The market has made about a $7 trillion recovery since the bottom and about 1/3 of that is just 14 stocks (AAPL, AMZN, MSFT, GOOGL, FB, V, MA, HD, NVDA, PYPL, CVX, ABBV, UNH, JNJ, ABBV).
The next chart shows the extreme changes in the market type direction which occurred quite suddenly — the fastest I have ever seen.
The next chart shows the volatility measurement for the last twelve months. While we have pulled back from the record volatility in March, we are still in the Volatile range.
The next table shows the weekly changes for the four major stock indices for the last month and recent annual closing prices. The Dow is down 11.06% so far in 2020, the S&P is down 5.77%, NASDAQ is up nearly 10%, and the Russell 2000 is down about 16%.
Part III: Our Four-Star Inflation-Deflation Model
Two components of the model displayed inflation while the other two showed deflation in May.
We’re moving slightly toward deflation which doesn’t make much sense in view of all the money printed and spent in the last two months. I’d expect huge inflation to show up soon, that is, unless we actually move into a deflationary depression.
Shadowstats.com still shows the inflation rate (as it was originally conceived in 1980) as being around 4% with the official rate being zero. 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. Shadow stats shows the current GDP as being strongly negative while the official figures are at about zero.
Part IV: Tracking the Dollar
USD closed May at 97.84. Compared with the rest of the world and in spite of our massive money printing, USD is not losing much value relative to other currencies. The Dollar closed down from its high of nearly 103 around March 18th. You can see the yo-yo ride USD has been on during 2020. To keep this current level in a long term perspective, however, remember that this index started more than 40 years ago in 1973 at 100. The chart is courtesy of www.marketwatch.com.
We’ve had a worldwide crash because of COVID-19 and right now, much of the world is transitioning out of lockdown conditions.
What’s interesting is how many different interpretations there are about how this pandemic will play out and what caused it. Let’s begin with predictions. One epidemiologist said that this pandemic doesn’t really go away until about 70% of the population is immune — either from contracting the virus or from a vaccine. No vaccine will be available for about a year — and perhaps never. A lot of pandemics never had a vaccine become available. What’s interesting is that, what I’ve heard (not sure if this is true or not), the US has committed to buy 300,000,000 such vaccines. I, for one, will probably not be taking it as all vaccines contain heavy does of aluminum which is deadly — and tends to produce early-onset Alzheimer’s disease.
This same epidemiologist said that a world-wide total quarantine for about a month would probably take care of this pandemic. But that’s not what we are doing. Instead, different countries have various versions of lockdowns with social distancing and the likely outcome for this approach is we have about two months of lockdown and things go back to normal – for a while. Then the infection rate and deaths increase and we have to go into another lockdown. This cycle continues to repeat until we have developed a vaccine and made it widely available.
It’s clear now what two actions have done in places where COVID19 is most under control.
- Massive testing; and
- they immediately trace the source of each infection and isolate those involved.
The South Koreans have done a good job containing the spread of the virus with these two strategies.
Currently, the US has 1.85 million cases with 106,586 deaths and 607, 892 recoveries. We’ll keep track of this on a monthly basis. Here is a graph of new cases:
As you can see, there is a slight drop in new cases, but not enough for anyone to be safe. The US is starting to open up again, but I don’t see this as a sign that we should open up again except that people (especially those with low levels of consciousness) are very unhappy. We are also seeing looting and violence over the death of George Floyd. Most demonstrators, however, seem to be peaceful but a few people are trying to make everything violent. The rioters are certainly paying no attention to the possibility of catching COVID-19 and they are risking a strong health danger — not from the riots, but from the lack of social distancing.
That’s my current market status report.
Until next month, this is Van Tharp.