Repost of Van Tharp email

I would urge you to sign up for the FREE email from Van Tharp, his emails contain invaluable information that most people just don’t have the time to obtain and compile themselves.  Links to his site are littered through-out the post.

Enjoy

 

Market  Update for Period Ending February 1, 2013,

Market Condition: Bull Quiet

by Van K. Tharp, Ph.D.

View              On-line

I  always say that people do not trade the markets; they trade their beliefs about  the markets. Consequently, 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.

If,  however, your beliefs are not similar to mine, then this information may not be  useful to you. If you are inclined to perform 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. Know  that I acknowledge that these are my beliefs and that your beliefs may be  different.

These  updates are in the first issue of Tharp’s Thoughts each month. This allows us  to get the closing month’s data. These updates cover 1) the market type (first  mentioned in the April 30, 2008 edition of Tharp’s Thoughts and readable on our  web site), 2) the five-week status on each of the major U.S. stock market  indices, 3) our four star inflation-deflation model plus John Williams’  statistics, and 4) the movement of the dollar. I now report on the strongest  and weakest areas of the overall market in a separate SQN® Report. I may  come out with that report twice a month if there are significant market changes.—Van K. Tharp

Part I:  Commentary—The Big Picture

I  am writing this on February 4th of the New Year.   The fiscal cliff has been postponed and the  real decisions are a few months away, so there have been no real changes.   The markets, however, seemed to like the  postponement, as they went up significantly in January.   We moved from neutral to bull and the  shorter term SQNs are actually strong bull.

According  to the U.S. National Debt clock (www.usdebtclock.org), our National  Debt stands at $16.35 trillion — that’s up $180 billion in the last month.   That’s equivalent to the United States increasing  its debt by $600 per person in one month — that’s an annual rate of $7,200.   So how would you like your taxes to go up by  $7,200 per person in your household this year?    If you are a family of four, that means an extra $28,800 per year in  taxes are necessary this year just to cover how mismanaged our government  is.   It really doesn’t matter who  the President is — it’s a horrible situation for anyone and most Americans really don’t have a clue how  bad the situation is.

Federal  tax revenue for the year is currently at $2.49 trillion, while spending is at  $3.54 trillion – that’s basically 50% deficit overspending.  The U.S. trade deficit for the year stands at  $740.9 billion.  The total debt in the US  per family is $732,610, while the average family has less than $5,800 in  savings.  In addition, U.S. unfunded liabilities  now total $122.6 trillion – or over one million dollars per taxpayer.    Do you see any way to overcome these  problems that doesn’t hurt?   Do you  understand what I mean by terrible fundamentals?

The  debt clock also shows this month’s population for the US at 315 million.  We have a work force of 143.3 million (down  200K from last month) supporting 62.3 million retirees or social security  recipients.  48.3 million food stamp  recipients are included in that population.   Additionally, there have been 1.3 million bankruptcies and 743,480 foreclosures  so far this year.

Here’s  my update for you from the debt clock web site with figures so you can watch the  changes over time.

chart1

Some  of the numbers fluctuate and do not make sense to me, but I’m just reporting  the monthly figures as I see them on the debt clock.  As reported, the bankruptcies and  foreclosures figures don’t make sense to me unless they are rolling 12 month  windows.   Watching the debt per family  grow from July’s $684,405 to $732,611 in six months has been quite interesting.  Someone has to pay for that eventually and  the bottom line points to each of us.

Part II: The Current  Stock Market Type Is Bull Quiet

Each  month, I look at the market SQN® score for the daily percent changes in the  S&P 500 Index over 200, 100, 50 and 25 days. For our purposes, the S&P  500 Index defines the market. The market SQN helps me understand the market’s  trend.

The  two short term SQN® scores for 25 and 50 days are both strong bull.  The 100 and 200-day SQNs are both bull.  These scores are much stronger than last month and  shows the short term run up.   Personally,  I like to have some short positions in IITM’s retirement account and currently,  I only have one good short.  I do have  several good long positions though.

This  is the chart tracking the 100 day Market SQN for the last year.  You can see how we have moved up from neutral  to bull in the last month.

chart2

Here’s  a weekly candlestick chart of the S&P 500.    Notice the nice run up over the last two months.  It’s no wonder the short term market types  are strong bull.

chart3

The  next graph shows that the volatility is still quiet.   Although that can change quickly, you are  generally pretty safe to say that the market is in no immediate danger of  falling strongly when the volatility is this quiet.

chart8

The  next chart shows the activity of the three major U.S. indices at the closing  Friday for each week last  month and at the end of the last few years as well.  In 2012, both the S&P 500 and the  NASDAQ 100 were up over 10% in 2012.

chart4

The  first month of 2013 was almost as good as the entire year of 2012.  In fact, the Dow 30 did better in January (up  8.27%) than it did in all of 2012 (up 5.64%).    So perhaps the end of the world  meant the end of bad markets.   I doubt  that, but it would be nice.

Overall,  2012 was positive, in fact, probably a little better than inflation with both  the S&P 500 and the NASDAQ 100 being in double digits.  Lastly, Jason Goepfert’s Daily Sentiment  Report for February 1st shows that smart money is 38% confident in a rally, but  down from 42% — so they probably missed the January rally, while dumb money is  63% confident (up from 50%).  That’s a  slightly risky picture.

Part III: Our  Four Star Inflation-Deflation Model

In  the simplest terms, inflation means that stuff gets more expensive, and  deflation means that stuff gets cheaper. There’s a correlation between the  inflation rate and market levels, so the inflation rate can help traders  understand big-picture processes.  Here  is my four star inflation-deflation model for the last few years and the last six months of 2012:

chart5

Looking  back over the most recent two-month and six-month periods provides the current  month’s score, given in the table below.

chart6

So,  now the model has shown a slight inflationary tendency for three straight  months.   Four of the last five months in  2012 showed an inflationary tendency.

www.Shadowstats.com  still shows that the real inflation rate is  about 10% based upon the way the CPI was calculated in 1980, and about 5.5%  based upon the way it was calculated in 1990.   Based upon how the government currently constructs its lie sheet, the  CPI is officially about 2%.  Right now,  at www.shadowstats.com, you’ll find  that the rate of GDP growth (subtracting real inflation) is at -2%.  Based upon those statistics, the GDP has  shown negative growth since 2000 (meaning recession) in all but one quarter of  2003.

Part IV:  Tracking the Dollar

Look  what has happened to the US dollar since August.   We’ve suffered a huge decline from 84 to  below 79.  Shortly after, we have had a  slight up movement, but now it looks like we are going to test the lows  again.  I’m going to Australia this  month, so I’d expect to see the Tharp Effect to cause the US dollar to drop  against the Aussie dollar.  The Tharp  Effect has been a long running joke but it seems to happen every time I travel  internationally.

chart7

General Comments

Money  is definitely flowing into the market.    We still don’t know what Congress will do with the fiscal considerations  they just postponed but remember that everything they do is short term and in  the direction of getting elected – always.   They do not think about the long term consequences of what they are  doing.   Also, remember earlier in this  article, I said they’d need to raise taxes by $28,800 per family this year in  order just to balance the budget.  Better  yet, they could cut spending by $28,800 per family.  Meanwhile, they argue about whether the rich  should handle the burden?

These monthly  market updates are not intended for predictive purposes; rather, they’re  intended to help traders decide which of their trading systems should work best  in the current market conditions. In bear markets—which are almost always  volatile by nature—shorter-term strategies, and those that allow going short,  tend to work better than long-only or intermediate/longer-term systems.

Which of your  trading systems fit this current market type? Of course, this question implies  that you have multiple trading systems and that you know how they perform under  various market conditions. If you haven’t heard of this concept or the other concepts  mentioned above, read my book, Super Trader,  which covers these areas and more, so that you can make money in any kind of  market conditions.

Crisis  always implies opportunity. Those with good trading skills can make money in  this market—a lot of money. There were lots of good opportunities in 2012, and  many more to come in 2013. Did you make money? If not, then do you understand  why not? The refinement of good trading skills doesn’t just happen by opening  an account and adding money. You probably spent years learning how to perform  your current job at a high skill level. Do you expect to perform at the same  high level in your trading without similar preparation? Financial market  trading is an arena filled with world-class competition. Additionally, and most  importantly, trading requires massive self-work to produce consistent, large profits  under multiple market conditions. Prepare yourself to succeed with a deep  desire, strong commitment and the right training.

About the Author:  Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com. His new book, Trading Beyond The Matrix, is expected for publication February 2013.

 

Trading Tip

January 2013 SQN®  Report

by Van K. Tharp, Ph.D.

View              On-line

There are numerous ETFs that now track everything from countries, commodities, currencies and stock market indices to individual market sectors.  ETFs provide a wonderfully easy way to discover what’s happening in the world markets.  Consequently, I now use the System Quality Number® (SQN®) score for 100 days to measure the relative performance of numerous markets in a world model.

The SQN 100 score uses the daily percent change for a 100-day period. Typically, an SQN score over 1.45 is strongly bullish and a score below -0.7 is very weak. We use the following color codes to help communicate the strengths and weaknesses of the ETFs:

• Green: ETFs with very strong SQN scores (0.75 to 1.5). • Yellow: ETFs with slightly positive SQN scores (0 to 0.75). • Brown:  ETFs with slightly negative SQN scores (0 to -0.7). • Red: Very weak ETFs that earn negative SQN scores (< -0.7).

  The world market model spreadsheet report below contains most currently available ETFs; including inverse funds, but excluding leveraged funds.  In short, it covers the geographic world, the major asset classes, the equity market segments, the industrial sectors and the major currencies.

World Market Summary

I’m amazed at how much green I’m seeing in the world summary.   We track 486 ETFs in the World Market Summary.  The Table below shows the make-up of the market. So right now, 57.1% of the world model is bullish and 8.6% is strongly bullish.

chart9

Let’s see what the markets look like as shown in our first figure.

The SQN world market summary is still green and there are no red areas except for the Japanese Yen and the VXX; the same as last month.  Most of the US stock market is light green, aside from the small cap growth stocks and the QQQ (which is slightly negative because of AAPL).  Europe is totally green except for Russia and Spain.   Asia is green except for China, Malaysia, S. Korea and Taiwan.  The only brown on the chart is the British Pound, the Canadian Dollar, the US Dollar, and the technology sector.

chart10

The next chart shows real estate, debt instruments, commodities and the top and bottom ETFs for the past 100 days.

Since most bonds are now either yellow or brown, people are moving out of that sector; only the junk bonds are green.   Among the commodities, gold, silver and oil are all brown, while agriculture has turned red.

Timber, however, appears to be a shining star, as it is now dark green.

chart11

We have six ETFs with SQN scores over two.   They include: Thailand, Japan Dividend, Gaming, Global Currencies (probably as basket), Timber and International Small Cap stock.   The weakest area, by far, is the Japanese Yen with a -3SQN (perhaps that’s more a function of the ETF than the Yen);   many of the weak funds are also short funds.

What’s Going On?

Last month, I talked about the strength of municipal bonds.   Today, they’ve disappeared off the list.   As I have said before, wait two months and the whole picture will be different.

Fundamentally, the U.S. is in the worst shape it’s been in a long, long time.  Our debt looks asymptotic and the dollar could soon be dismissed as the world’s reserve currency.  Given all of that, the markets look relative strong, at least for a while.

Next month, I’ll be in Sydney presenting three  Peak Performance workshops and RJ Hixson will be doing the update; so until next time, this is Van Tharp.

Crises always offer opportunities, but to capture those opportunities you MUST know what you are doing.  If you want to trade these markets, you need to approach them as a trader, not a long-term investor.  We’d like to help you learn how to trade professionally; trying to navigate these markets without an education is hazardous to your wealth.

All the beliefs given in this update are my own. Though I find them useful, you may not.  You can only trade your beliefs about the markets.

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