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  • Article Market Condition: Neutral Normal by Van K. Tharp, Ph.D.
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  • TradingTip June 2012 SQN® Report by Van K. Tharp, Ph.D.

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vanMarket Update for the Period Ending June 30, 2012
Market Condition: Neutral Normal

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

Weak fundamentals continue to support the secular bear market, which we’ve been in since 2000 (next week, I'll have an article that focuses on the fundamentals for the 12 years since then). If you'd simply bought the S&P500 on December 31, 1999 and held it until now, you’d be down more than 7%. What's more, if you compare GDP growth to REAL inflation as the folks at do, you’ll see that we’ve also been in a recession for the last 12 years.

I think the current political arguments are quite funny. They’re really nothing more than an interesting game. Basically, you find some way to criticize your opponents, to make them look bad so that the public votes for you instead. The problem is that nobody seems to bring up the issues that actually matter—like our asymptotic government debt and weak dollar. But politicians can’t really resolve those issues; they can only postpone the solutions. If a politician actually tried to do what you’d need to do to solve them, he'd never win another election. Here are some sample solutions:

  • Slash government spending at least 50%.
  • Slash military spending by more than 50% and end U.S. involvement in all foreign conflicts now.
  • Institute a national sales tax of about 20% until the debt is reduced to zero.
  • Void social programs (this will happen anyway when they become too burdensome) and develop vested pension programs like Singapore and other well-run countries have. If the government bought and held the S&P 500 average with, say, a 0.5% fee, Americans would be better off than they are now with Social Security. We could also allow people to invest pension money in a house in the form of a 30% down payment.
  • Tell all politicians that they cannot be re-elected unless the budget is balanced.
  • Get rid of the central bank (The Federal Reserve is owned by the large private banks).
  • Make sure that the Secretary of the Treasury has no ties to big businesses or big banks.

When someone proposes these kinds of solutions nowadays, he’s considered an idiot and not taken seriously in the political arena. But implementing them is necessary if we’re going to correct what’s wrong with the United States government.

Actually, I just found this graph, and I take back my solution. How about cutting the military by 95%?


View Larger Image

As for the markets, we are now firmly into the part of the year when pension money is not flowing into the stock market, so the only thing that might help it would be government stimulus money—if it comes. We’ll see. It’s a political year, so the party in power will do all it can to stimulate the economy.

Part II: The Current Stock Market Type Is Neutral Normal

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 back in bull mode. The 25- and 100-day SQN scores are neutral, though the 50 day is in bear mode. The 100-day SQN score was in bear for four out of five days last week, but it finished the month in neutral.     


Here’s a weekly candlestick chart of the S&P 500, so you can see how the SQN scores relate to the actual prices. Last month was a slightly up month, but not enough to cover the losses made in May.


The next graph shows that the volatility is still in the normal range, but notice how it’s picked up in the last two months. Bear markets are usually very volatile, or at least volatile, so we have a little room to go. Also, the volatility ETF (VXX) is still very weak.


The next chart shows the activity of the three major U.S. indices. All three averages are up in 2012. June also had three decent up weeks.

Weekly Changes for the Three Major Stock Indices
  Dow 30   S&P 500   NASDAQ 100  
Date Close % Change Close %Change Close % Change
Close 04 10,783.01   1,211.12   1,621.12  
Close 05 10,717.50 -0.60% 1,248.29 3.07% 1,645.20 1.50%
Close 06 12,463.15 16.29% 1,418.30 13.62% 1,756.90 6.79%
Close 07 13,264.82 6.43% 1,468.36 3.53% 2,084.93 18.67%
Close 08 8776.39 -33.84% 903.25 -38.49% 1,211.65 -41.89%
Close 09 10428.05 18.82% 1,115.1 23.45% 1,860.31 53.54%
Close 10 11,577.51 11.02% 1,257.64 12.78% 2,217.86 19.22%
Close 11 12,217.56 5.53% 1,256.60 -0.08% 2,277.83 2.70%
01-Jun-12 12,118.57 -0.81% 1,278.04 -1.71% 2,458.83 -7.95%
08-June-12 12,554.30 3.59% 1,325.66 3.73% 2,559.21 4.08%
15-Jun-12 12,767.17 1.70% 1,342.84 1.30% 2,571.23 0.47%
22-Jun-12 12,640.78 -0.99% 1,335.02 -0.58% 2,585.53 0.56%
29-Jun-12 12,880.09 1.89% 1,362.16 2.03% 2,615.72 1.17%
Year to Date 12,118.57 5.42% 1,362.16 8.40% 2,615.72 14.83%

Jason Goepfert’s Daily Sentiment Report for Friday, June 29th suggests that smart money is 50% confident in a rally, while dumb money is 54% confident. That’s a pretty neutral picture, just like our market type. Jason says that for the last 50 years, a strong June in the S&P500 has not translated well into July. The same goes for returns in August. This is at best a short-term traders market.

Part III: Our Four Star Inflation-Deflation Model

In the simplest terms, inflation means that stuff gets more expensive, while deflation means that stuff gets cheaper. At any given point, there are numerous forces working throughout the global economy that appear as stuff gets more expensive or cheaper. Traders who understand the big-picture effects of inflation and deflation can have an edge. Here is my four-star inflation-deflation model for the last few years.

Date CRB/CCI XLB Gold XLF Total Score
Dec 05 347.89 30.28 513.00 31.67  
Dec 06 394.89 34.84 635.50 36.74  
Dec 07 476.08 41.70 833.30 28.90  
Dec 08 352.06 22.74 865.00 12.52  
Dec 09 484.42 32.99 1,104.00 14.10  
Dec 10 629.53 38.47 1,410.25 16.00  
Dec 11 564.37 33.50 1,574.59 13.00  
Sep 11 571.38 29.36 1,620.00 11.81 -0.5
Oct 11 604.28 34.45 1,724.20 13.50 -0.5
Nov 11 584.22 34.53 1,746.00 12.81 +0.5
Dec 11 564.37 33.50 1,574.59 13.00 +0.5
Jan 12 589.00 37.18 1,744.00 14.06 0
Feb 12 600.32 36.97 1,724.60 14.76 -0.5
Mar 12 572.94 36.97 1,662.57 15.80 +1.0
Apr 12 558.55 36.67 1,651.25 15.43 -2.5
May 12 508.76 33.82 1,606.00 14.00 -3.5
Jun 12 539.66 35.29 1,598.50 14.64 -2.0

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

March 2012 CRB
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
Total Score
Current Level Lower Lower Lower Higher Lower Lower Lower Higher  
Score   -1   +1/2   -1   -1/2 -2.0

We still seem to have a deflationary scenario, and it seems like a strong trend. Only one month out of the past six has shown an inflationary tendency, and the model gave strong deflationary signals in the previous two months. When you look at the SQN® Report in this newsletter, you’ll see that commodities are way down across the board. That’s a major sign of deflation, and in a deflationary market, cash is king. still shows that the real inflation rate is about 5%. Based on their calculations for inflation and GDP, the U.S. GDP has shown negative growth since 2000 (meaning recession) in all but one quarter of 2003.

The small speculator is about as bearish on precious metals as he has been for some time, which might be a sign that things are about to pick up. But sentiment does not end down trends.

Part IV: Tracking the Dollar

Look what happened to the U.S. dollar in May. It had a huge and very steep run from below 79 all the way up to 83. June was a very volatile sideways month, with a range of nearly $1.75. It finished with a huge down candle on the 29th, last Friday.


I’m going on vacation in July, but I’m staying in the U.S. (with the exception of a few days in Canada), so maybe the U.S. dollar won’t be subject to the “Tharp Factor” this time (it always seems to go down when I travel). We’ll just have to wait and see…

General Comments

If you’re playing the equities market, you should now be considering systems that work in sideways and bear markets. The best overall strategy, however, is probably to be a short-term trader.

These monthly market updates are not intended for predictive purposes; rather, they say what the market is doing right now and are intended to help traders decide which trading systems should work best in the current market conditions. In bear markets—which are by nature almost always volatile—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 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

June 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 a System Quality Number® (SQN®)-based method to measure the relative performance of numerous markets in a world model.

The SQN 100 score method uses the daily percent changes for a 100-day period to measure direction and consistency over the 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: 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

The SQN world market summary is really bad, except for a few rays of sunshine in the U.S. markets. Eight countries and seven commodities are red, including gold and silver—something I haven’t seen in a long time. Worse yet, no countries, currencies or commodities are green. The best color in each of these categories is yellow: three countries, one commodity (water), and one currency (the U.S. dollar). For most people’s equity, that kind of news is like a giant sucking sound.

There are a few light green areas, including various debt instruments, consumer staples, health care, pharmaceuticals and utilities. The only solid green ETF is the one that invests in dividend leaders.

The strongest countries are Thailand, Belgium, Mexico and the United States. The strongest currency is the U.S. dollar. People are fleeing to yield again, including me. I’ll be collecting about $20,000 in dividends in July, but that only represents a 2.5% return, and I don’t get that in August and September.

The chart below shows the picture at the end of the month.


View Larger Image

What we see happening right now in this secular bear market reflects something I’ve been talking about for some time: trends don’t last very long. Consequently, you need to be a trader, not an investor. You need systems that make money over days or a few weeks, not months or years.

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


Most commodities are now red, with energy still being the hardest-hit sector. Even clean energy isn’t safe, although coal is the worst sector of all.

What’s interesting is that debt instruments are not the strongest sectors. Instead, dividend yield is strongest, with areas like consumer staples, utilities, pharmaceuticals, etc. being among the strongest areas. Real estate throughout the world is yellow, which means that, relatively speaking, it is a good place to be.

The weakest ETFs are generally energy or agriculture-related. Spain comes up as one of the worst ETFs, as do metals and mining.

What's Going On?

As I’ve said in previous months, the big picture is not that good. Fundamentally, the U.S. is in the worst shape it’s been in a long, long time. Our debt looks asymptotic and the dollar (despite its rise to the upside) could soon be dismissed as the world’s reserve currency. One of my currency trader friends suggested that the euro, yen and dollar could all collapse, probably in that order.

Lastly, China isn’t doing that well either, and as a result, it is no longer buying up the world’s supply of commodities.

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.

Until next month, this is Van Tharp.

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July 5, 2012 - Issue 584

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