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vanMonthly Market Update for Period Ending March 31, 2012
Market Condition: Bull Quiet

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 charges.—Van K. Tharp

Part I: Commentary—The Big Picture

We’ve had a nice run-up in recent months, one that has been clearly documented in these updates. The NASDAQ has had its 13th straight up week—something that hasn’t happened since 1999. Apple, of course, has been a major part of that. But remember that we are in a secular bear market. If you had invested your money in the stock market back when the secular bear began in 2000 and held it there until now, you’d be quite unhappy with the result—especially after you included the effects of inflation and the decline in the value of the U.S. dollar.

Secular bear markets do not necessarily correspond with weak big-picture fundamentals, but the fundamentals behind the current bear are very weak. I’m expecting this bear market to last eight more years at minimum, but that means that the market could just go sideways with a lot of volatility for the coming years.

I just returned from a trip during which I traveled to three countries—Australia, China, and Malaysia, and in my opinion, all three have done much better that the U.S. Malaysia, for example, is growing tremendously. Although I’ve had several speaking engagements in Kuala Lumpur over the years, I really hadn’t gone outside the capital city since 1993, when I visited the small village where my wife grew up. At that time, there really wasn’t much there. When we returned to the same village almost twenty years later, I was shocked to find that a big shopping center had sprung up nearby, and that it was actually starting to look like a place where one could get everything one needed. I went to the local casino, which is located at the highest spot in the country, and found that most of the people there were Malaysians—not foreign tourists—and that they seemed to have a lot of money to throw away.

China was even more interesting. When I last visited in 1997, Shanghai was modern, but it still retained some signs of the old city. Not anymore! Today, skyscrapers with unusual contemporary designs dominate the Shanghai skyline. The train I took from the airport travels 431 kilometers per hour and covers the 35-kilometer route from the airport in 7 minutes; it cost me about $8 to ride and the Chinese government about $1.5 billion to build. China loses money on it, but they’re using it as a model for how to run and develop longer lines. Finally, when you enter the country, the customs inspector who greets you has a machine that allows you to rate him (from very satisfied to very unsatisfied). Can you imagine that happening in the United States and Canada, where some of the border inspectors can be downright rude and tyrannical? Still, the Chinese do photograph everyone quite subtlety.

In Australia, I now get 90 cents for my U.S. dollar after exchange fees. On top of that, everything costs, just in dollar prices, about 30% more in Sydney than it does in the U.S. Last month, I visited Paddy’s Market, something I haven’t been able to do on most of my previous trips to Sydney because it’s only open from 9 to 5, four days a week (it used to be three), and that’s usually when I’m teaching workshops. In my opinion, there are two places to shop in Sydney: Paddy’s Market, and everywhere else. At least for now, I prefer Paddy’s Market.

The Economist uses the McDonald’s Big Mac as an index for what's going on in a country. Let’s take a look at that. In the U.S., a Big Mac meal costs about $5.50; in Australia, it costs about 8 Aussie dollars; in Malaysia, it’s a little over $2; and in China, it’s about $4. In Shanghai, however, an apartment could cost a million U.S. dollars, and a car for which you might pay $25,000 in the U.S. could easily cost over $120,000. You also have to buy a license plate (a one-time-only fee that is transferable), which costs about $10,000.

Back in the U.S., the Federal Reserve has said it will continue to stimulate the economy and keep interest rates low. This has created a nice run-up in the market and a nasty shock for all of those who went big into treasuries recently (for safety).

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 SQN is neutral. The 25- and 100-day SQN scores are bull, while the 50-day is strongly bullish. We use the 100-day SQN score, which is bullish, as shown in the chart below.

Chart 1

Here’s a weekly candlestick chart of the S&P 500, so you can see how the SQN scores relate to the actual prices.

Chart 2

Notice the nice uptrend that has occurred since last December and how it was reflected in the market type.

The next graph shows that the volatility is now quiet. This is a great sign that there is still more up movement to come.

Chart 3

The next chart shows the activity of the three major U.S. indices.

Table 1

Notice that all three indices are up significantly over just 3 months and that the NASDAQ is up 21%. This is a significant change, and some of it is due to AAPL. Apple now has a market cap of over $500 billion, which is larger than the rest of the U.S. retail sector. Of course, my iPads get sent from China.

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. Right now, it’s not so easy to tell if we have an inflationary environment or a deflationary one because there are strong crosscurrents of both forces at work. My model shows no trend since mid-2011. Here is my four star inflation-deflation model for the last few years.

Table 2

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

Table 3

With the highest rating in the last six months, the model indicates that inflation is coming back. When you look at the traditional measures of inflation in the SQN® Report below, however, you’ll see that they are not strong at all.

Part of the reason we don’t have massive inflation from the huge amount of currency being created by the Fed is that the banks are not lending. The next table shows that the money multiplier stands at 0.82. Thus, for every dollar the Fed prints, the banks are only lending out 0.82 cents. It’s been as high as 3.0, so today’s very low multiplier has a minimal effect when it comes to creating inflation.

Chart 4

Part IV: Tracking the Dollar

While continued low interest rates have been good for the stock market, they have not been so good for the U.S. dollar. In recent weeks, I’ve been watching it decline against the Aussie dollar. Let’s look at a daily chart that shows the dollar futures contract price for the last six months.

Chart 5

As you can see, the dollar is in a consolidation phase, and the short-term trend is down. Bernanke has said little in terms of dollar support, and the currency markets are reacting accordingly. If you look at the chart since the beginning of the year, you’ll see that, as the stock market has gone up, the dollar has gone down.

General Comments

If you are playing the equities market and you have systems that work well in bull markets, you should be fully invested in equities. Hopefully, you did that when we first mentioned it some months back. It’s probably safe to be invested for now, considering that we’re clearly at a point where it is relatively easy to make money by being fully invested. The stock market clearly doesn’t see the “end of the world” in 2012, but if you have no proven system, it can still be fairly hard to make money—even under the current market conditions. 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 plenty of good opportunities in 2011 and, so far, many more in 2012. 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

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Trading Tip

March 2012 SQN® Report

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; a score below -0.7 is very weak. We use the following color codes to help communicate the strength or weakness 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: ETFs with very 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

Hopefully, all of you are trading your bull market systems now and doing quite well. The U.S. market has been going up since December, and that trend continued through March. Every U.S. market segment is green. Most of the U.S. industrial sectors are either green or yellow, with the exception of the VXX (good for bulls) and the metals/mining issue.

Europe and Asia are now mostly yellow and brown, and the giant growth countries—India and China—are among the lower-performing ETFs.

Currencies, which are mostly yellow and brown, remain weak; the Japanese yen is red. Right now, it looks like much of the money in the world has been coming to the U.S. stock market.


Other Asset Classes, Strongest/Weakest ETFs

The next table shows the relative performance of commodities, real estate and interest rates on the left-hand side. The strongest and weakest areas of all the ETFs are on the right.

As a group, commodities have weakened in the last month and now show a mix of colors from red to green. However, Natural Gas and Agriculture are two of the weakest issues in the whole ETF matrix. Nothing looks very good right now; even gold and silver are negative. At this point, the market doesn’t seem to be expecting any inflation. Oil remains somewhat strong, though it may have reached a congestion area, while natural gas remains the worst of the commodities—and worst among all of the ETFs.

Real estate (RWR) remains green, as do junk bonds, but the other real estate offerings and interest rate products have weakened by one color from last month.


It was not long ago that the highest-scoring ETF list comprised exclusively, or almost exclusively, debt-based or income-based ETFs. Everyone was fleeing there for security—something I said was a crazy thing to do because there was basically no place for those ETFs to go but down. The rules, even for big money, have changed, but most don’t know it yet. Municipal bonds are still among the highest-rated ETFs, although a few others made their way to the top this month, including biotech and pharma-oriented issues. Most of the weakest ETFs were inverse funds, but also among the worst were natural gas and agriculture.

What's Going On?

Last month, RJ made the following comment about the big picture:

The world market model that Ken Long developed and Van adapted using his SQN® scores really does show where the money has been flowing over the recent period. Money has been moving out of the “safety” of government debt products and making it back into equities in the U.S., Asia, and much of Europe. Because there are mixed signals on inflation, inflation hedges such as commodities haven’t picked up yet.

Trends don’t tend to last that long in this climate, so enjoy the ride while you can. I would actually be surprised if the bull market persists through the summer. Why? Because the big picture is not that good. Fundamentally, the U.S. is in the worst shape it’s been in a long, long time.

Crises offers 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 and, although I find them useful, you may not. You can only trade your beliefs about the markets. Until next month, this is Van Tharp.

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