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  • Article Market Condition: Neutral Quiet by Van K. Tharp, Ph.D.
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vanMarket Update for the Period Ending August 31st, 2012 Market Condition: Neutral 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

I spent most of July driving 500 miles and listening to a series from Great Courses entitled “Economics in the 20th Century.” As a behavioral modeler, I have quite a lot of skill and experience when it comes to determining the themes and common elements of things, but after nearly eight hours of listening, I couldn’t even determine what the subject matter was supposed to be. Nevertheless, here is my brief attempt to summarize some of the main topics:

  • The gold standard doesn’t work because new gold determines the money supply.
  • Raising or lowering taxes doesn’t work because it is too slow.
  • Raising or lowering interest rates often has an impact, but throughout most of the 20th century, the Federal Reserve didn’t really know what it was doing.
  • War has a major impact on economies.
  • The last 25 years of the 20th century were characterized by a lack of real growth. The speaker gave numerous reasons why, then stated why those reasons weren’t valid.
  • There was also a hodgepodge about the difference between high and low income earners, the impact of technology, what to do about big companies, government regulation, etc.

The person giving the lecture was a senior economics professor, and after listening to him, I understand why many people consider economics to be a rather useless profession.

One thing he said that held water: the Federal Reserve seemed to have some control over the economy by raising and lowering interest rates—that is, until now. Basically, if the Federal Reserve raises interest rates at this point, the impact of debt payments on our overall deficit would be catastrophic. In other words, we have a much bigger mess today than any we faced at any time during the 20th Century.

As I listened to the lecture, I developed the impression that it was one of the oldest of the Great Courses series. It seemed to end around 1997, so there was nothing about the last 13 years. He only spent about 20 minutes on the impact of debt, and that was regarding the debt of the 1980’s.

According to the U.S. National Debt clock (, our national debt stands at $15.958 trillion. Federal tax revenue for the year is currently at $2.374 trillion, while spending is at $3.585 trillion—more than a 50% deficit in over-spending (interestingly, the spending figure for this month is smaller than the one given for last month). The U.S. trade deficit for the year stands at $797 billion. The total debt in the U.S. per family is $683,971, while the average family has less than $5,000 in savings. The debt clock now tracks U.S. unfunded liabilities as well, and they total $120,451 trillion—over one million per taxpayer. Do you see any solution for this situation that won’t hurt somehow? Do you understand what I mean by terrible fundamentals?

The debt clock also shows that the U.S. currently has a workforce of 143 million supporting 67.8 million retirees and social security recipients. Out of a total population of 314 million, 46.7 million receive food stamps. We’ve also seen 1.3 million bankruptcies and 888,940 foreclosures this year.

I didn’t realize until recently that the U.S. debt clock’s website tracked most data second by second. I’m including the following table so that you can monitor the data yourself.

The State of the United States
Month Ending National Debt Federal Tax Revenue Federal Spending Trade Deficit Debt Per Family Savings Per Family


7/31/2012 $15.93 trillion $2.364 trillion $3.632 trillion $810 billion $684,405 $4,854 1,298,313 919,346
8/31/2012 $16.00 trillion $2.374 trillion $3.585 trillion $797 billion $683,397 $4,784 1,330,071 888,940

It will be interesting to see how this data changes over time.

We are now firmly into the annual period when pension money is not flowing into the stock market, but government stimulus money might be able to help, if it comes. We’ll see. It’s a presidential election year, so the party in power will do all it can to stimulate the economy.

Part II: The Current Stock Market Type Is Neutral 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- and 50-day SQNs are both slightly bullish, while the 100- and 25-day SQNs are both neutral.

Chart 1

Here’s a weekly candlestick chart of the S&P 500. We’ve been in an uptrend since mid-May, which is why the short-term market type measures are bullish.

Chart 2

The next graph shows that the volatility is still normal. It seems to be quieting down. And since bear markets are usually very volatile or at least volatile, we have a little room to go. The VXX is still very weak.

Chart 3

The next chart shows the activity of the three major U.S. indices at the closing Friday of each week.

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%
03-Aug-12 13,039.00 6.72% 1,390.99 10.69% 2,676.00 17.48%
10-Aug-12 13,158.00 0.91% 1,405.87 1.07% 2,722.96 1.75%
17-Aug-12 13,242.00 0.64% 1,418.16 0.87% 2,780.30 2.11%
24-Aug-12 13,138.00 -0.79% 1,411.13 -0.50% 2,778.05 -0.08%
31-Aug-12 13,088.00 -0.38% 1,406.58 -0.32% 2,772.24 -0.21%
Year to Date 13,088.00 7.12% 1,406.58 11.94% 2,772.24 21.71%

The market is now up by at least single digits in every market, and it’s up over 21% in the NASDAQ.

Lastly, Jason Goepfert’s Daily Sentiment Report for Friday, August 31st suggests that smart money is 42% confident in a rally, and dumb money is 54% confident. That’s a pretty neutral picture, which coincides with our market type.

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, we seem to have a deflationary trend. Commodities are way down, and the last two months have strong deflationary trends. In a deflationary market, cash is king.

Here is my four-star inflation-deflation model for each month of this year and 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  
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
Jul 12 560.88 34.84 1622.00 14.66 -1.0
Aug 12 576.91 35.65 1648.50 15.16 -2.5

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

July 2012 CRB
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
2 Mo
6 Mo
Total Score
Current Level Higher Lower Higher Lower Higher Lower Higher Higher  
Score   -1/2   -1/2   -1/2   -1 -2.5

We still seem to be in the deflationary scenario that’s been going on for the last five months. However, the numbers are starting to turn up. Only one month out of the eight months since the beginning of 2012 has shown an inflationary tendency. still shows that the real inflation rate is about 5%. Based on 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 U.S. dollar since May. It’s had a huge and very steep run from below 79 all the way up to 84. June was a very volatile sideways month with a range of nearly $1.75, finishing with a huge down candle on the 29th of the month. July took off to new highs but saw a steep decline that continued through August.

Chart 4

General Comments

The market is neutral for the 100-day period and bullish in two other time frames, and I feel pretty good about it. Volatility is very quiet, and there are a lot of nice trends starting or resuming. For example, gold, silver, and silver and gold stocks all look pretty good.

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 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

August 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 Market SQN 100 incorporates 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: 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

Once again, I’m a little surprised at the SQN world market summary. I’m finding it easy to make money, but the picture still looks pretty mixed. Most countries are now yellow, with four reds (India, China, Brazil and Chile). No countries are green.

Most of the model looks really bad, except for a few rays of sunshine in the U.S. markets. Like last month, eight countries are red.

Two currencies are red (Brazilian Real and Swiss Franc), while the Japanese Yen looks strong. Some sectors are light green, such as biotech, consumer staples, health care, homebuilders, pharmaceuticals, REITs, telecom, media and utilities, while others, like metals and mining, oil and gas and semiconductors look quite weak.

People are still fleeing to yield. A lot of money seems to be moving into debt instruments, even though yields are extremely low. Short-term bonds are the strongest area.

The chart below shows the picture for countries, industrial sectors, currencies and U.S. market segments at the end of the month.

Chart 1

View Larger Image

What we see happening again in this secular bear market reflects what 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. Note, though, that gold and silver have had nice trends off their lows, even though they only show up as yellow in the world model.

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

Chart 2

Most commodities, gold, silver and water have moved from red to yellow. Natural gas now seems to be particularly strong after a number of years of being weak. And real estate is now green suggesting people feel they can get yield there.

The weakest ETFs are generally energy related, but some countries are also there. With coal being the weakest ETF. The strongest ETFs still seem to be debt instruments.

What's Going On?

I noticed last week that it was possible to get a 5R trade in the S&P 500 both on the long and the short side. That is, the risk was low and the reward in either direction was fairly good. However, the price hasn’t moved far enough yet in either direction to suggest which trade one might want to take.

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. China isn’t doing too well either, and as a result, it is no longer buying up the world’s supply of commodities. I said almost exactly the same thing last month, so little has changed.

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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