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 still have a potential $3.5 trillion social spending package ahead, with higher taxes coming at us. However, they haven’t agreed upon a $1.5 trillion infrastructure bill yet. The Democrats, with only the minimum majority of votes for passage, cannot agree on anything. Meanwhile, the Fed is acting like economic stimulation may end in the near future with a possible reduction in QE.
The pandemic is by no means over, with just over half the country fully vaccinated. Of those not vaccinated, some don’t trust the government, some don’t trust the vaccines, and some think the pandemic is not real. I witnessed this on my trip last month. At various places, masks were required (on the Navajo reservations in New Mexico and indoors in Las Vegas) but at other stops, people acted as if there was no danger at all (Longhorn Steakhouse in Fort Smith, AK).
The following table shows the information that we track regularly on the US Debt Clock website.
This next table tracks bankruptcies, foreclosures, and employment figures.
The table below tracks money supply figures, credit card debt, and the number of US millionaires.
Part II: The Current Stock Market Type Is Neutral Normal
We classify the market type direction using the Market SQN score for a 100-day period. To get an idea of how the market direction looks on longer and shorter timeframes, we apply the same methodology to different periods. Here is the market type direction from a 40-week period to a 5-week period:
- 200 days – Strong Bull in August, Strong Bull again,
- 100 days – Strong Bull last month, now Neutral,
- 50 days – Strong Bull last month, now Bear,
- 25 days – Bull last month, and now Strong Bear.
All of the periods but the longest ones are weakening now.
The S&P 500 weekly price bars go from the lower left to the upper right and flatten out – a long bull market with a four-week correction. There was one all-time high last month on September 3rd.
For the same time period as the chart above, the chart below shows the Market SQN score.
It was a Bull and Strong Bull market for almost the whole of the last year. Last month, the market went a little bit into Neutral.
The final chart shows volatility for the last twelve months using the ATR%. Volatility spent the last year in a long-term trend of decreasing volatility mostly in the Normal and Quiet ranges. After the last few months of Quiet, volatility is just back in the Normal zone for the last week or two.
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 10% and 15% over the year.
Part III: Our Four-Star Inflation-Deflation Model
Looking at the table below, let’s see if our model reflects an inflation.
The model produced a result of mild inflation for September. Except for BTC and XLF, the other components continued to show moderate or strong inflation. For the last year or so, the model has had moderate to strong inflation results.
Part IV: Tracking the Dollar
USD has been going up slowly since May and, as of October 1st, was at 94.23. For all of the headlines about inflation, the dollar does not appear to be losing relative value against other currencies. You can read about USD being the strongest currency in our World Market Model in the SQN Report below. The US Dollar ETF (UUP) had a Market SQN score of 1.34 (bullish) at the end of September.
For most readers, the US Dollar is your base currency. What will you do if inflation continues or increases
Conclusion
We had a weakening market with September being one of the weakest equity markets for some time.
Democrats and Republicans cannot agree on anything and tend to vote strictly along party lines. Within the Democratic party, however, there are currently strong disagreements about another stimulus package with progressive Liberals unhappy about spending only $3.5 trillion. At the same time, Democratic Senator Manchin from West Virginia will not support anything over $1.5 trillion.
The pandemic is still going strong and Covid remains a major issue impacting the entire world.
Until next month, this is Van Tharp.