Van Tharps Market Update for the Period Ending November 30, 2013

Some good content – notice the points referring to Deflation, that is something I and Elliott Wave International have been harping on about for years – don’t think about wave counts, It’s the analysis that is great – years ahead of the market in terms of what to expect.

Definitely worth subscribing to Dr. Van Tharps free email newsletters as they often have good common sense articles about what’s going on throughout the world of finance and especially Trading/Investing.

Van

Market Update for the Period Ending November 30, 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

We’ve  been in a bull market for some time.   Since the runup started in 2009, we have not had even a 10%  correction.  The Dow has hit 16,000 (but  you have to remember that the components of the Dow were changed before that  occurred).  Since 2009, the Fed has been  pumping money into the financial system and it basically goes straight into the  stock market.  When adjusted for  inflation figures (from the US government), however, the Dow is still below its  2000 peak.   Additionally, Richard Russell  says the S&P 500 (which is more reflective of the economy) would still have  to go up by 16% to make a new inflation adjusted high.

The  Fed may employ a new tool to make adjustments.   They can adjust the rate of interest they currently pay on the deposits banks  place with them.  That rate is currently  at 0.25%, and the Fed is thinking about reducing it to zero.   In other words, it’s telling banks to keep  their money and invest it elsewhere.  Now,  banks are retaliating by threatening to charge depositors to hold their money.

These  are some of the reasons why I can say we’re in a secular bear market.  And I still expect PE ratios for the S&P  500 to be in the single digit range before the secular bear market ends.   If the Fed continues to create dollars  faster than we are creating debt, then our debt will be manageable.   But this will, of course, create  hyperinflation.

The  U.S. finances are a total mess.   The  Federal Reserve has now decided that we are “under-inflating” meaning they are  concerned about deflation.   Thus, they  have given themselves “carte blanche” to continue QE and zero short-term  interest rates.   The stimulus money  tends to go into the stock market because the big banks are putting the money  there rather than lending it.   So in one  sense, expect a continual boom in the stock market.   However, the Fed’s guidance and actions  suggest that it does not even have an exit strategy in place to stop QE.  When the Fed hints of stopping, it will send  the market into a tailspin.   And if it  raises interest rate by just 1%, it means a huge increase in interest costs for the  US government.

In  addition, Bloomberg  announced that the People’s Bank of China will stop dollar purchases that  limit the Yuan’s appreciation.  China now  has $1.294 trillion in foreign reserves invested in the dollar and their plan seems to be to maintain that  level.   It also means that they will invest their  excess  assets into other currencies such as the Yuan or other asset classes such as gold.   Current estimates put China’s  gold holdings at about 4,800 tons.   The  total world supply is probably about 40,000 tons.

Large  investors, however, don’t seem to be believers in deflation because they are  now moving into every kind of tangible asset.    These include all sorts of collectibles such as great art, jewelry,  farmland, classic cars, etc.   Works of art are starting to go for  over $100 million.  What about rare stamps which I’ve been touting for  some time? I’m an old time collector.

Yes,  we’re in a bull market but it’s a bull market denominated in the US dollar. Its  reign as the world’s reserve currency could easily end.   Indeed, Gabriel Grammatidis, who teaches our Forex course,  predicts that the Yen, Euro, and the US Dollar will all collapse (long term),  possibly in that order.   So then does  the Yuan take over?

Let’s  look at the state of the United States chart courtesy of the debt clock.   One month was missed while I was gone, but  it’s not that important as the trends are obvious.

chart0

They  have changed the US debt clock website a little to  include US unfunded liabilities.   I’m  going to start using that column instead of savings per family.  Right now, our total unfunded liabilities is  $126.8 trillion, with most of that being Medicare and prescription drug  liability — $88 trillion and $22 trillion, respectively.   The social security unfunded liability is  only a little less than our total debt at $16.7 trillion.

Today,  our official debt is over $17 trillion, up $80 billion from the previous month  and it’s going up a trillion every year.    Furthermore, the debt situation is so bad that the Federal Reserve has  had to drive short-term interest rates to almost zero and long-term rates to  very low numbers.   This is killing the  U.S. dollar and interest rates have nowhere to go but up.   In fact, betting on eventual higher interest  rates is about as close to a certain bet (long term) as you could ever make, however,  such a bet might be similar to shorting “dotcom” stocks in early 1999.   You could experience a lot of pain before  you reap your windfall.

The  US population remains at 316 million with taxpayers standing at 114.8  million.   The Boomer retirement wave is  in its earliest stages, as retirees now stand at 46.9 million.   Disabled people collecting social security  stands at 14.4 million, while food stamp recipients total 47.8  million with all three of those group  being up over the previous  month. So that’s 109.1 million people that are supported either by the  government or the 114.8 million taxpayers.    But really about 11 million taxpayers pay 90% of U.S. taxes.  This means that 11.5 million workers are  supporting 109 million other people through the government.   Do these numbers add up to you?  Do they seem sustainable?

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  200-day market SQN remains in strong bull mode, while the 100, 50, and 25-day  SQN scores are all just in the bull range.   Market volatility is very quiet and this, for now, keeps us very safe.

(to see the three following charts stacked and aligned, click here)

chart1

chart2

You can see that we had a few weeks in the strong bull range,  and then retreated back into bull.

chart3

(to see the three previous charts stacked and aligned, click here)

And the last chart is  our volatility chart.  You can see that  it’s been a long time since we have been in any way volatile.

Below is a chart of the  weekly changes in the three major US Indices.      As you can see, all three  indices are up substantially on the year with better than 20% gain. The  S&P 500 is up nearly 30% and the NASDAQ 100 is over 30% (despite AAPL).   Has your performance been as good as the  indices this year?

chart4

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.   As  a result of the  CRB:CCI index discontinuing  on  April 17th, 2013, I switched the commodity price  component of the model to  the ETF called DBC.  I have kept the prior years’ CCI data (from 2005 to 2012) as  a reference since the DBC data goes back only a few years.

chart5

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

Month

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

Lower

Lower

Higher

Higher

Lower

Lower

Higher

Higher

Nov-13

-1

 +1

-1

-1

-2

Again, it was another month  where the deflationary forces seem to be winning.  In the last 11 months  we have had one inflationary  month, 9 deflationary months, and one month at zero.  And of course, as we continually point out, one of the reasons is  that banks are not lending.  The money multiplier put out by the Fed is  still at 0.7 rather than the normal 3.0 which indicates the stimulus money is not actually getting out of the banks  and into the economy to stimulate it. That’s  a deflationary force.

Shadowstats.com, however, publishes real economic data (rather than the government manipulation of the data), and suggests that current inflation is  running around 9% (see the chart below).

chart6

Shadowstats also says that we’ve been in a recession since the secular bull market started (the  chart below uses real inflation to calculate GDP growth).    Actually, we have had just one quarter in 13 years where we have not been in a  recession.

chart7

Part IV:  Tracking the Dollar

Since  its peak in July, the USD has been on a downtrend that recently gathered  strength.  The large drop came shortly  after Fed Reserve Chairman Bernanke announced the continuation of the QE  program.  The dollar, the Euro, and the  Yen are all extremely weak currencies.   All three will probably fail, but who knows which one will fall  first.   The dollar does have some bias  for survival since much of the world’s debt is still dollar denominated.   However, as the Fed is forced to buy more  and more of that debt, the situation will change.

Below  is a chart of the US Dollar Index.   If  it dropped below 78, it would probably be a serious sign.

chart 8

General Comments

Longer  term, the competitive stimulus measures from central banks propels the big  picture.  Shorter term, multiple markets  continue to offer plenty of opportunities to prepared traders.  The keys are awareness, preparation, and  execution.

On  a side note, I have a Ph.D. in biological psychology.  I used to be, in effect, a brain  researcher.  The research models at that  time centered on the idea of stimulating the animal (or brain) and looking at the  response.  I did not see those models as  very useful in the late 1970s so I moved out of the field to study  investors.  I don’t regret that move at  all;  it’s been fun.  If I were to get that same Ph.D. today, however,  I’d probably stay in the field because the current research is very interesting  to me.

On  that note, the latest issue of Science magazine is a special issue dealing with  the brain.  The last ten pages of the  magazine are advertisements looking for qualified brain researchers.   Wow.   I extended my Ph.D. for a year because one of my colleagues who  graduated early in 3.5 years was one of 200 of applicants for a single opening —  a $10,000 per year teaching job.   Now  there are 10 pages worth of ads in Science Magazine for research positions in  the brain sciences.   But don’t worry,  everything I learned is long out of date and even if my brain knowledge was current,  I’d never work for anyone else again.    Plus, I love what I do.

Until  the New Year, this is Van Tharp.

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 condition.

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 newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com

Advertisements
Leave a comment

Comment Here:

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: