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
Dr. Oz is running for Senate as a Republican in Pennsylvania. I don’t know how that fits into the big picture but somehow my gut says it means something.
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 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, COVID 19 is by no means over. For example, more NFL players are getting on COVID 19 restriction than last year when there was total isolation. One of my staff members has it – the second person on our staff since the outbreak. And now we have a new variety that might be immune to the vaccines. 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.
In addition, we have a problem with employment. Low-wage chain restaurants and other brick-and-mortar businesses are having a tough time finding people to fill their jobs. Those who work there would rather not work and receive government money instead.
Much of this is a worldwide problem – with different variations for each country depending upon how they have faced the pandemic. I still have a fully paid safari in South Africa. But South Africa tends to be a problem in terms of getting in and getting out. The country wishes to send back much of the vaccines they possess because of a general skepticism about taking them. I will probably just have to write off the cost of that trip. My guide could easily be out of business soon.
But now I’d really like to comment on the new Omicron Covid variant. A South African doctor reported it, saying those who caught it had very mild symptoms and that there were no hospitalizations. Then, the media sensationalized it. Biden and Fauci then reacted to the media as did Wall Street.…all on the sensationalizing of some data from South Africa.
Here is what the media said:
- Will it cause more shutdowns?
- Is it resistant to all current vaccines?
- Will it spread worldwide and cause many more deaths?
And here were the reactions.
- The Dow dropped 1560 points on Friday and Monday.
- Biden banned travel to eight African countries, including South Africa.
- Fauci made dire predictions of the future.
- The governor of New York reestablished the mask mandate for NY and suggested that hospitals suspend elective surgeries.
- The Netherlands then reported that 13 people on a plane from South Africa were infected with the new variant. Suddenly, all of Europe panicked and flights to and from South Africa were banned.
All of this amounts to a hysteric panic that has no basis in reality. The news from South Africa was about a new variant that produced very mild symptoms, but we reacted like it was the end of the world. Can you begin to see how we only trade our beliefs and how those beliefs are often quite distorted? They are certainly not useful.
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 first 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 second table tracks money supply figures, credit card debt, and the number of millionaires. The number that might jump out for you in all of these tables, based on the website usdebtclock.org, is one figure that dwarfs all of the others – derivatives. Interesting but should it be concerned?
Part II: The Current Stock Market Type Is Sideways Normal
I monitor the Market SQN for timeframes from 5-week bars to 40-week 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 October, now Bull
- 100 days – Bull last month, now Neutral
- 50 days – Bull last month, now Bull
- 25 days – Bull last month, and now Neutral
You can see that all time frames either stayed the same or got more bearish, even though the yearly chart looks quite strong.
For the same time period as the chart above, the chart below shows the Market SQN score showing Strong Bull for almost the whole of the last year, except for a few forays into bull territory, including now.
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 Quiet for most of November and have now moved slightly into Normal.
The next table shows September’s weekly changes for the four major stock indices and recent annual closing prices. All four indices are up between 11% and 25% over the year. Hopefully, your performance is also at least in the 20% gain range for the year.
Part III: Our Four-Star Inflation-Deflation Model
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.
Our model is showing some inflation but I’m really beginning to think that gold doesn’t belong in the index anymore.
Part IV: Tracking the Dollar
USD has been slowly going up since the end of May and as of the open on December 1st it was $96, which is higher than last month despite an end of the month weakness. The dollar does not appear to be losing its relative value compared with other currencies. All that might mean, however, is that traders are factoring in inflation for the other major currencies as well. Our World Market Model in the SQN Report this month has the US dollar ETF (UUP) with a Market SQN score of exactly 1.14 for just a little below the price last month. Still, it’s the strongest currency we track now.
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?
We have a neutral market, and a relatively strong dollar compared with other currencies. I seriously doubt that an additional stimulus package will pass this year which means no new taxes and pretty much the same policies which have done well for the market.
Covid remains a major issue impacting the entire world.
Until next month, this is Van Tharp.