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  • Article Updating the Long-Term Big Picture by Van K. Tharp, Ph.D.
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  • TradingTip The Neutral Zone by D.R. Barton, Jr.
  • Mailbag Did Van Change the Ranges Used to Measure Market Type?

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vanUpdating the Long-Term Big Picture

It's been a while since I've written about my big-picture views outside of the monthly updates, so I thought it would be good for me to step back and review my big picture in greater detail. One of my primary beliefs is that the market tends to run in 15-20 year cycles. These cycles have been called primary trends (Richard Russell), secular bull/bear markets (Ed Easterling) and long-term cycles. For a good review of these cycles, you might look at Michael Alexander’s book Stock Market Cycles and Ed Easterling’s book Unexpected Returns: Understanding Stock Market Cycles. Right now, we’re in a secular bear market that started in 2000.

I tend to subscribe to Ed Easterling’s viewpoint that these cycles are characterized by changes in the price-earnings ratio (P/E) of stocks, not the prices of stocks. Thus, in secular bull markets, P/E for the S&P 500 tends to go up. If P/Es go up from, say, 8 to 40, it’s very likely that prices will go up as well. The last secular bull market started in 1982 with P/Es of about 7 and continued until March of 2000, when P/Es reached about 44.

In 2000, a secular bear market started. It should run 15-20 years and end sometime between 2015 and 2020. So far, the S&P 500 P/E has dropped from 44 to about 15.17, which is close to the historical average. By the end of a secular bear market, P/Es are usually in the single digits.

Secular Bear Markets and the Economy

Sometimes, there is no relationship between the economy and what’s going on in the secular market—bear or bull. More than once, secular bear markets have occurred when the economy was doing fairly well. The current secular bear market, however, corresponds to the worst set of fundamentals ever—and some of those are just now kicking in. Here is a short list.

1. Recession. While the government would have you think that the economy has been pretty good, it really isn’t the case, according to A recession occurs when the GDP growth for a quarter is negative. Here, “growth” usually means growth bigger than the inflation factor, so economists typically measure the change in the GDP growth less the inflation factor. If the number is positive, we’re in a net state of growth. The problem is that the government manipulates the statistics for inflation. When you use the original statistics for the consumer price index (CPI) as does, it turns out that, except for the 4th quarter of 2003, we’ve been in a recession since 2000. That’s essentially a 12-year recession. My guess is that very few Americans know that.

2. Debt. In 1999, people used to ask me how high I thought the stock market could go. In response, I’d usually pick something up, throw it in the air, and watch it crash to the ground. NASDAQ prices were essentially parabolic, which always means that a crash is coming sooner or later.

Unfortunately, you can say the same thing about U.S. debt—it’s parabolic. We can measure debt in a number of ways, and they’re all bad:

  • U.S. government debt. The official U.S. government debt is now at $15.8 trillion, or about $50,390 per citizen. The GDP is at $15.225 trillion, so the debt has actually grown bigger than the GDP.
  • U.S. government debt including future liabilities. In 2003, the Federal Reserve published a paper that listed all of our debt, including future unfunded liabilities, at $68 trillion. The conclusion was that the U.S. is bankrupt. By the way, that number has probably now gone up to around $100 trillion.
  • The combined state government debt of all 50 states is currently over a trillion dollars.
  • Individual debt for U.S. citizens is currently over $15 trillion.

All of this debt is unsustainable.

3. Graying of the Population. For many years, the Baby Boomer generation has been putting money into mutual funds to finance its retirement. Mutual funds need to be nearly 100% invested in stocks, so this has supported the whole U.S. stock market. However, a sea change is about to occur.

I turned 65 last year, so I personally represent the first year of the Baby Boomers. Most people consider 65 the retirement age, but now Social Security defines it as 66. What this generally means is that, pretty soon, there will be a giant sucking sound coming out of the stock market as the Baby Boomers start withdrawing money from their mutual funds to pay their retirement expenses. I’m not sure how soon that will start, but eventually, more money will be coming out of the market to pay pensions than will be going in to fund future pensions. Harry Dent has been making use of this information in his forecasts for a coming depression.

4. Status of the U.S. Dollar. For decades, the rest of the world has considered the U.S. dollar to be the world’s primary currency. This currency reserve status meant that, effectively, we could count on other countries to finance our debt. But that can only last so long. I guarantee that at some point in the future, the U.S. dollar will no longer have this lofty status. It’s only a matter of time.

5. Status of Other Key Currencies. There are actually two other currencies that are even more likely to collapse than the U.S. dollar—the euro and the Japanese yen.

a. The Euro. I didn’t realize how badly the EU had hurt some member countries until I recently read a report from Europe by one of Doug Casey’s editors in which he wrote specifically about Portugal. In many ways, it’s the EU’s fault that Portugal has basically gone bankrupt. Portugal was largely a fishing country prior to joining the European Union. One of the conditions for joining the EU, however, was that they destroy a large percentage of their fishing fleet. The EU determined that Portuguese fishermen were catching too many fish and destroying the ecology of the Atlantic Ocean, and this, according to the EU, constituted an unfair economic advantage. Portugal cut its fishing fleet in half, and now they actually need to buy fish from the Spanish to help feed their own population.

But the EU’s meddling in the Portuguese economy went much further than that. Portugal was also told to get rid of a large percentage of its orange industry capacity. Now, Spain buys Portugal’s unsellable excess oranges and uses them to make marmalade—which they then sell back to the Portuguese. The net effect of these sorts of manipulations is that Portugal has run a trade deficit for about twenty years now—in other words, since shortly after joining the EU in 1986. The report was lengthy, so I could say more, but you’ll likely read similar stories about Spain, Ireland, Greece, and Italy very soon. Are you beginning to get the picture when it comes to the reasons for the weakness in the euro?

b. The Yen. The Japanese economy has been in a recession since about 1990. For a long time, though, the dollar was equal to about 100 Yen, and the Japanese kept it low with low interest rates. People would borrow in yen and use the money to buy other currencies, like the dollar, that were paying high interest rates. Now that interest rates are low in the U.S., the dollar is only worth about 80 yen. And while U.S. debt is slightly over 100% of U.S. GDP, Japanese debt is about 200% of their GDP. The only advantage the Japanese have is that they have a lot of individual savings, whereas Americans have a lot of personal debt.

6. Derivatives. Remember 2008, when the world lost about 30% of its wealth in about a year due to the subprime meltdown? Well, the situation hasn’t gone away; big banks still hold a lot of derivative positions. In fact, those derivative positions total much more than the net wealth of the entire world. J.P. Morgan, for example, has about $US93 trillion in derivatives. What does that really mean? No one but those in the know at J.P. Morgan can say for sure, but I doubt it’s good. By the way, that position is more than the estimated wealth of the world.

7. The Interdependency of the Entire World Economy. Lastly, we have to talk about the dependency of the world’s economy. If the euro fails, it affects the entire world. If the U.S. dollar fails, it affects the entire world. When a derivative meltdown occurs, it affects the entire world. We are now that interdependent. All of these crises affect everybody.

We’ve noticed a trend in our own business in the last few years. About half of our current Super Trader candidates and more than half of our workshop attendees seem to come from outside the United States. Despite the opportunity that crises offer, and despite the fact that we teach people how to survive and actually prosper in uncertain economic times, Americans seem very scared and generally averse to studying such subjects right now. Of course, when you’ve spent many years doing what everyone else was doing and have lost much of your net worth as a result, you tend to become a little scared.

Yes, we are in a secular bear market, and it’s nowhere near finished, but there’s no reason to fear. As I say, crisis implies opportunity; you just need to educate yourself about what to do in the future. In fact, I personally think this crisis is healthy for the world and essential for cleaning up some of the inefficiency. But that’s another story.


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


The Neutral Zone

I don’t think I’ve ever heard the word complacency (or its derivatives) used in a positive way. I guess that makes sense, because the word is supposed to denote being both at ease and unaware of lurking dangers.

Interesting, I saw the word used in three different articles in the days surrounding the recent early July highs. Another article published before Tuesday’s big drop (July 10th) mentioned the complacency of market participants as we head into earnings season, despite the fact that most analysts are projecting a pullback in earnings momentum.

To get my head around this thought of complacency in the markets, I turned to my favorite short/intermediate indication of market emotion—the VIX. This harbinger of trader sentiment shows how options players are voting with dollars and cents, so I always keep it on my radar screen. Let’s see what it might be telling us about current market conditions.

A Neutral Market (Making Traders Salivate)

In last week’s Tharp’s Thoughts, Van outlined the quantitative concepts that lead to characterizing the market as neutral (price movement) normal (volatility inside of routine ranges). While this type of market is boring and relatively unproductive for long-term trend followers, it is bread and butter for short and intermediate “regression toward the mean” traders.

In this type of market, extremes become more predictable and shorter-term market turns are more tradable. The VIX is often called the market’s fear gauge, but it’s more accurately viewed as an uncertainty gauge—and in support of Van’s neutral normal market classification, it’s signaling more of the same for now. Let’s look at the chart below:


The chart on top is SPY (the S&P 500 ETF), and the one on the bottom is the VIX with a regression-line channel drawn through the last 30 days of data.

The market volatility as measured by the options players and reflected in the VIX has clearly been heading down over the last 30 trading days. Even the 7/10 big down day didn’t move the needle very much. In short, the VIX is confirming that the market players are in a complacent mode.

What does this tell us? Until the market can break below last year’s closing price (which is just a few points below the June low) or pop above the double-top made early in May, you should stay the course and play the extremes of the trading range. Buy the dips and sell the rips.

This is a range trader’s market, and breakout players will continue to be punished until further notice.

Great Trading, D. R.

About the Author: A passion for the systematic approach to the markets and a lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".




Did Van Change the Ranges Used to Measure Market Type?

Q: The investment group I'm in is looking at market conditions and volatility as defined by Van for determining the big picture so that we can develop appropriate shorter-term timing systems and stock searches. We'd seen in the July 15, 2009 newsletter the definition of the SQN ranges as:

  • Strong Bull > 1.5
  • Bull >= 0.3
  • Neutral—the rest
  • Bear < -0.3
  • Strong Bear < -1

However, I noticed in the June 6 newsletter that he says we were in bear normal because:

"We use the 100-day market SQN to classify the market type. On May 31st, the 100-day market SQN ended in the neutral range, at 0.01-just 2 hundredths of a point away from bear. On June 4th, the market SQN changed to bear."

According to the table above, however, a -.01 would be a neutral market. Did the ranges change? I couldn't find mention of it in later newsletters. Could you tell me what you are using for ranges now?

A: After some additional research about a year back, Van did, in fact, change the criteria from what he originally published in 2009.

Here are his new market-type directional component criteria:

  • Strong Bull > 1.47
  • Bull >= 0.7
  • Neutral < .7 and >= 0
  • Bear < 0
  • Strong Bear < -0.7

He did some variance analysis for all of the historical data, and that guided the selection of the new figures. His standpoint now is that any negative SQN is a bear market.

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July 11, 2012 - Issue 585

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