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Van Tharp

October 2014 Market Update:


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I always say that people do not trade the markets; they trade their beliefs about the markets. In that same way, I'd like to point out that these updates reflect my beliefs. If my beliefs and your beliefs are not the same, you may not find them useful. 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.

However, if your beliefs are not similar to mine, then this information may not be useful to you. Thus, if you are inclined to do 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. Just simply know that I admit that these are my beliefs and that your beliefs might be different.

These monthly 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), 2) the five week status on each of the major US stock market indices, 3) our four star inflation-deflation model plus John Williams' statistics, and 4) tracking the dollar. I will now report on the strongest and weakest areas of the overall market as a separate SQN™ Report. And that may come out twice a month if there are significant market charges.

Part I: Van Commentary—The Big Picture

The S&P 500 has had 1 new all-time high close in October and that was on the last day of the month.   The 100 day range change % is less than 4%.  To me, this is a classic sideways market that could stay the same, go up, or go down.  Gold and silver are crashing. 

We are in a period of a strong dollar, deflation, and a sideways market closing on an all-time high.

That’s the big picture in a nutshell.

Debt Clock

The State of the United States

Month Ending

National Debt

Federal Tax Revenue

Federal Spending

Trade Deficit

Debt Per Family

Unfunded Liabilities


People supported by them

July 31 2012

$15.93 trillion

$2.364 trillion

$3.632 trillion

$810 billion





Dec 30 2012

$16.42 trillion

$2.452 trillion

$3.540 trillion

$740.7 billion





July 31, 2013



$3.535 trillion

$703 billion


Unfunded Liabilities

115.2 million


Dec 31 2013

$17.27 trillion

$2,82 trillion

$3,480 trillion

$692 billion


$127.2 trillion

115.0 million


Jan 31 2014

$17.32 trillion

$2.84 trillion

$3.494 trillion

$676 billion


$127.7 trillion

115.2 million


Feb 28 2014

$17.38 trillion

$2.86 trillion

$3.503 trillion

$683 billion


$128.1 trillion

115.4 million


Mar 31 2014

$17.57 trillion

$2.89 trillion

$3.519 trillion

$683 billion


$128.6 trillion

115.6 million


Apr 30 2014


$2.91 trillion

$3.528 trillion

$683 billion


$128.9 trillion

115.8 million


May 31 2014


$2.93 trillion

$3.54 trillion

$689 billion


$129.4 trillion

116.0 million


Jun 30 2014

$17.54 trillion

$2.95 trillion

$3.51 trillion

$697 billion


$124.8 trillion

116.1 million


Jul 31 2014

$17.61 trillion

$2.95 trillion

$3.52 trillion

$695 billion


$119.7 trillion

116.3 million

104.8 M

Aug 31 2014

$17.70 trillion

$2.97 trillion

$3.53 trillion

$706 billion



116.5 million


Sep 30 2014

$17.77 trillion

$2.98 trillion

$3.53 trillion

$707 billion



116.7 million


Oct 31 2014

$17.9 trillion

$3.05 trillion

$3.53 trillion

$703.5 billion


$115.4 trillion

116.9 trillion


chart 1

(To see a larger version of this image, click here.)

Today, our official debt is over $17.9 trillion, up from $16.89 trillion in July 2013.   So that’s up $1 trillion in 15 months — or $626.7 billion per month.  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 will have a long term fatal impact on 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.

The US listing for unfunded liabilities has gone down for five straight months, from $129.4 trillion on May 31st to $115.4 trillion on October 31st. $80.1 trillion of that total goes to Medicare and $20.1 trillion goes for prescription drug liabilities.   The Social Security unfunded liability is only a little less than our total official debt at $15.1 trillion and even that went down a little. 

So right now the US government is trimming the total unfunded liabilities at a rate of $2.8 trillion per month.   Just imagine what we could do in 12 months.  At this rate, they could wipe off $116 trillion in a little over three years.  Nice work government employees!

The US population is at 319 million with taxpayers standing at 116.79 million.   The initial set of Boomers are retiring and retirees now stand at 48 million.   Disabled people collecting Social Security stands at 10.9 million, while food stamp recipients total 46.2 million. That’s 104.9 million people that are supported by the government (or the 116.7 million taxpayers).  I could actually add 4.4 million federal employees to the roles of those supported by the taxpayers.   Plus there are 19.7 million state and local employees supported by other taxes.  In reality, about 11.7 million taxpayers pay 90% of U.S. taxes.  This means that 11.67 million workers are supporting 105 million other people through the government.   In addition, the top 1% of American tax payers pays 40% of the tax bill. 

Do these numbers add up to you?  Do they seem sustainable?  Meanwhile, the official number of unemployed is 9.05 million while the actual number of unemployed is 18.1 million.   And these numbers are conservative compared with those published by which show unemployment levels at near depression level statistics.

Part II: The Current Stock Market Type Is Neutral Normal

From Oct 13th through October 20th the market crept into bear normal territory.  On October 21st, it went back into neutral territory and remained there through Oct 31st with the 100 day range change % being 3.82%.  On the other hand, volatility (the 20 day ATR 20%) was 0.9% on October 1st and by Oct 31st it was 1.51% which is almost into volatile territory.    This is for an S&P 500 that’s up 6.49% on the year. 

As you know, 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.  At the October 31st close, the Market SQN® scores for the 200 period was back to Bull.  The other three Market SQN scores were all neutral. 

The charts below include weekly bars for the S&P 500 over the last year, the Market SQN® score for 100 days, and the ATR percent volatility.

What is most revealing is the volatility charge.  Notice how close the volatility measure is to normal territory which provides a warning - we are not far at all from bear volatile conditions.

This market right is providing us with a schooling in sideways market conditions – which can be among the most difficult to trade.   In the meantime, investment advisory services are screaming doom and gloom.  One Elliot Wave firm, for example, called a major market top in September (but they have done that many times over the years and have not been correct).

charts 2 - 4

Below is a chart of the weekly changes in the three major US Indices.  All three indices are up for the year, but not by a lot.   The S&P 500 is now up 9.18% on the year, while the NASDAQ 100 is up 15.76%.   The DOW is only up 6.49% on the year. 


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. 


We had had three inflationary months so far this year but now we are back to the deflationary trend.  Just look at silver, gold and commodities for a confirmation if you need one. 

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










Total Score











Sep 14










Part IV: Tracking the Dollar

The U.S. Dollar continues its up-move.  It had a slight correction in October but by the end of the month had reached new highs again.  A lot of money has been made in the US dollar recently.

chart 7

General Comments

Generally, I read a lot of email newsletters just to keep informed of what other people are reading.  While most email newsletters continue to be full of doom and gloom, the reality is that we are in a sideways market that is very difficult to trade.  It could turn down strongly, but we will have some warning for that because volatility still has a ways to go.

I gave this prescription for the last few months and I will continue to include in in this update for at least the rest of the year.  

This is my prescription for growth in the US economy.   Politicians please read.

1) Kill deficit spending immediately, by stopping wars and spending on what we mistakenly call “defense.”   We can’t afford to be the world peace keeper any more.  We spend more than a trillion per year on “defense.”   

2) Make sure no more deficit spending continues by passing a law calling for a re-election of new politicians any year the government cannot spend within their means.  (I heard this first from Warren Buffet and borrowed it).

3) Right now the U.S. education system cannot compete with those of many other countries outside of the US except at the university level.  And our best universities are filled with brilliant foreign students.  Great, let’s accept the situation as it is and allow the brilliant foreign students who getting masters and Ph.D. degrees to immediately become U.S. citizens instead of forcing them to return to their own countries to use the skills we taught them abroad. 

4) Give a $50,000 tax rebate to any US citizen getting a Ph.D. in the United States to help them pay for their education or their education loans.

5) Allow US companies to compete in the world in a big way by eliminating the tax on the foreign earnings of US citizen living abroad.  Taxing foreign earnings of US citizens living in the US is fine, but not those who must live abroad to help our corporations grow and who must also pay foreign tax on their earnings.   In addition, the new tax laws requiring foreign banks to report on the assets of US citizens is totally killing our ability to compete overseas.  A US company abroad is now required to have almost 100% foreign employees because US employees cannot get bank accounts that are necessary to live.

6) Reduce Corporate Income tax from some of the highest levels in the world to competitive levels.  Do this partially by not taxing foreign earnings from US corporates that are used to stimulate the economy.   This would eliminate the US trade deficit fairly quickly.   Right now the US government is saying that companies like Apple that channel their profits into Ireland (9% corporate tax vs 39% in the US) have to be stopped from avoiding US taxes.   A much better prescription would be to tax them 10% on money brought back to the US.

7) I personally ordered a Tesla model S for delivery in October.  When the P85D was announced, that is more powerful and more efficient, I upgraded to that one.   I didn’t take delivery on the other one and my new one is now due to be delivered about Christmas time.  Right now the government gives people a $7500 credit for something that could totally eliminate the US dependency on foreign oil and dramatically reduce air pollution.   Tesla has actually released their patents to the rest of the world.   The model S actually met two of the criteria that I wanted in a car (great power -- 0-60 in 4.2 seconds) and great gas mileage (infinite).   I didn’t think a Tesla met my third requirement (something I could have fun driving around the US).   But it now looks like by the time I get my car they will have a ring of charging stations around the US and I will be able to drive around the US for FREE in 2015 and perhaps even do the same in many parts of Canada by the end of 2016.  Let’s encourage the US to help Tesla (an American company) with their mission.  Obviously, this recommendation is more of a personal bias. 

Some people have found statement 7 to be the most controversial.   For example, the infinite gas mileage statement gets a lot of negative comments.   Well, Teslas emit no pollution.   Their goal is to have all the charging stations be solar powered (although that has not been achieved yet because of difficulties with building permits).   And in my case, my electricity (that will be used to power the battery) comes from nuclear power.  

Until next month’s update, this is Van Tharp.

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 His newest book, Trading Beyond The Matrix, is available now at

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Trading Tip

October 2014 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 apply a version of my System Quality Number® (SQN®) score to measure the relative performance of numerous markets in a world model. 
The Market SQN score uses the daily percent change for input over a 100-day period. Typically, a Market SQN score over 1.47 is strongly bullish and a score below -0.7 is very weak. The following color codes help communicate the strengths and weaknesses of the ETFs in this report:

  • Dark Green:  ETFs with very strong SQN® 100 scores > 1.47
  • Light Green: ETFs with strong SQN 100 scores (0.70 to 1.47).
  • Yellow: ETFs with slightly positive Market SQN scores (0 to 0.70).  These are Neutral/Sideways
  • Brown:  ETFs with slightly negative Market SQN scores (0 to -0.7).
  • Red: Very weak ETFs that earn negative Market SQN scores (< -0.7).

This is basically the same ratings that we use for the Market SQN® Score.  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

Each month, we look at the equities markets across the globe by segment, region and sector. In the last month, Asia is mixed.   The US is fairly neutral with everything but the QQQ being yellow.  Europe is the worst I’ve ever seen it with everything being red.    

chart 8

(To see a larger version of this chart, click here.)

US equities segments (at the center top of the table) are yellow except for QQQ which is light green and the microcaps which are brown. Other America’s equity markets are not doing that well — Chile is red, Canada, Brazil and Latin America are brown, and Mexico alone is yellow.

Europe has not been doing well recently and got much worse over the last month. All the countries in Europe are red. Austria continues to have an SQN 100 score below -2.0.

Asia is in much better shape with India, Thailand, and China/India light green.   Japan, China, Hong Kong and Taiwan are yellow.  Australia, Malaysia and Singapore are brown and South Korea is red.     

Looking at the market sectors, the following sectors are in good shape being green - biotech, consumer staples, health care, pharmaceuticals, REITS, technology, utilities, broker dealers, food and beverage, and software.  Many sectors are yellow, while building material, home builders, semiconductors and gaming are brown.  And finally metals and mining, and oil and gas equipment and exploration are red.

Volatility has gone positive (from what seemed like perpetual red) into yellow territory.

For a second month in a row, currencies are dominated by the US Dollar but it has moved down from 3.0 in September to 1.92 now.   The Yuan is light green.  Most everything else is either red or brown (Rupee and Real). 

Commodities, Real Estate, Debt, Top and Bottom Lists

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


Commodities this month are much weaker overall with only livestock and base metals being positive (yellow).  Everything else is red or brown.  And the blended commodities ETF (DBC) is the worst of all at -2.4.   The place to be right now is the US dollar and almost everything else is terrible. 

US real estate is light green and Chinese real estate is brown, which is a flip flop from last month.  All interest rates are light green except for 1-3 year and inflation protected bonds.   Junk bonds are brown.   Remember a few months ago when they were the strongest interest rate product as everyone was looking for yield?      

This month, only the top 2 ETFs in the database have SQN® scores above 2.0 with muni bonds moving back to the top of the list.   

All of the weakest ETFs scored below -2.0 but unlike last month, none are below -3.0.    The really weak ETFs tend to be agriculture and commodity related.


Now let’s look at our newest table which measures the percentage of ETFs in each of the strength categories. 


Very Bullish




Very Bearish


> 1.5

0.75 - 1.5

0 - 0.75

0 - -0.7

< - 0.7

Jan 31st






Feb 28th






Mar 31st






Apr 30th






May 31st






Jun 30th






Jul 31st






Aug 30th






Sep 30th






Nov 1st






Dec 1st






Dec 31st












Jan 31st






Feb 28th






Mar 31st






Apr 30th






May 31st 






Jun 30th






Aug 29th






Sep 30th






Oct 31st






In August, 15.8% of the ETFs we track were negative.  By the end of September it was 42.5%, and by the end October it’s 44%.  That’s a huge change.  Similarly, last month 33.5% of the ETFs were bullish and by the end of October it dropped to 20.8%.   This is with the S&P 500 hitting an all-time high close on October 31st.   Does that make sense to you?

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