My market type describes the market now; it does not predict -VKT
#888 May 2, 2018
  • Feature: April 2018 Market Update: Sideways Normal Market Type, by Van K. Tharp, Ph.D.
  • Workshops: Van's Cornerstone, Peak Performance 101, May, July and October
  • Tips: April 2018 System Quality Number® Report, by Van K. Tharp, Ph.D.
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Van Tharp’s signature three-day workshop, Peak Performance 101 is built around helping you identify winning trading beliefs and behaviors based on the model of successful trading that Dr. Tharp has developed from his 30 years of researching the top traders in the world. You’ll also learn how to incorporate these useful beliefs and behaviors into your trading back home.

Van Tharp’s work boils down to helping you understand how you can develop beliefs and habits to be a peak performing trader. In addition to your beliefs, mental states such as abundance and peace produce better trading results compared to fear or greed. You can eliminate trading mistakes and follow your rules for trading regardless of how you feel in the moment or whatever is making headlines. Successful trading is not about being right. It’s about cutting losses and letting profits run.

At the most basic level, people must trade by processing information. Most people are inefficient information processors to start with and have alot of biases, which influence trading decisions. Dr. Van Tharp documented as many as 25 common biases. However, most of them can be understood by realizing that trading and investing are very simple processes that human beings try to make much more complex.

To learn more about this this workshop, scroll down to our workshop's section.

Feature Article

April 2018 Market Update:
Sideways Normal Market Type
by Van K. Tharp, Ph.D.
Van's photo
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. 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 go through 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. 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 which allows us to get the closing data from the previous month. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp's Thoughts), 2) the debt statistics for the US, 3) the five-week status on each of the major US stock market indices, 4) our four-star inflation-deflation model, and 5) tracking the US dollar. I also write a report on the strongest and weakest areas of the overall market as a separate SQN™ Report. Significant market changes may mean the SQN Report comes out more than once a month.

Part I: The Big Picture

The equity markets finished 2017 in Strong Bull Quiet after having been in Bull or Strong Bull since early in the year. The market had been that type for a long time and made the average person who was in the market look like a genius. Conditions now, however, are clearly different with the market moving sideways with some volatility.

Right now, this market’s future direction is anybody’s guess, however, the buy and hold strategies are clearly off. If you haven’t been stopped out, it’s now time to think if your trading strategies will work in a sideways or bear market. Typically, such systems don’t work in a Neutral market. Sideways conditions can be absolutely devastating for traders – much worse than bear markets. (Our sideways market workshop is coming up this summer, so we recommend you find out what to do under such conditions).

April Market Update Chart 1
The US National Debt has finally surpassed $21 trillion, and I remember when I thought a trillion was awful. Federal spending is now listed at over $4 trillion for the last eight months.

Part II: The Current Stock Market Type Is Neutral (Sideways) Normal

This month the Market SQN for 100 days, the period we use for to label the market type direction is Neutral. The Market SQN score for 200 days is also Neutral but the 50 day and the 25 day score are both now Bear. May is often the time for selling.
April Market Update Chart 2
The graph above shows the S&P 500 in weekly bars over the last year so it is easy to see the 2017 bull market. In January, the S&P 500 had 14 new all-time highs. There have been none since then. The last all-time high for the S&P was 68 days ago.
April Market Update Chart 3
Here is the market direction graph as measured by the Market SQN score for the last 100 days. It changed from a definite Strong Bear and actually reached Neutral territory in just a few weeks. After bouncing between Neutral and Bull in February and March, it has been clearly in Neutral territory since late March.
April Market Update Chart 4
In February, market volatility zoomed through the Normal range and moved into Volatile territory. In March, it moved back into Normal territory, became Volatile again, and is now back in Normal. If it stays here, then we could begin to worry about this market.

The table below shows the weekly changes in the three major stock indices over the last month.
April Market Update Chart 5
After huge gains in 2017, the Dow 30 and the S&P 500 are actually down for the current year. The NASDAQ 100 is up just over 4% on the year.

Part III: Our Four-Star Inflation-Deflation Model

Here are the model scores for the inflation-deflation model —
April Market Update Chart 6
April Market Update Chart 7
Our model showed signs of inflation for much of 2017 but that trend is weakening. After 8 months of inflationary scores, the model suddenly dipped down into deflation in February, went back to a mild inflation score, and now we are neutral.

Part IV: Tracking the Dollar

The dollar was more or less down all of 2017 but it has been pretty flat so far for 2018 though it started to go up in April. We can probably assume that the anticipated stronger interest rates will strengthen the dollar.
April Market Update Chart 8

In three months, we’ve gone from a Strong Bull Quiet market type to Neutral Volatile to Neutral Normal. That’s quite a change and one we seldom see, if ever.

But what does it mean?

I’m not predicting anything here. The market is going sideways. Neutral markets are very difficult to trade and many people lose money in such markets. You need to pay attention to what the market is doing. Three months ago, a buy and hold strategy worked well (i.e., with a 25% trailing stop) but now the market type is clearly different and you need to determine what you will do.

I monitor market type because it helps traders understand which kind of trading systems they should be using right now. You would not have done too well with Bull Quiet systems in the last month but systems that take advantage of volatility would have done fine.

Rather than trying to predict what the market will do and worrying about being proactive with your positions ahead of the market, just know the market type and trade the appropriate systems.

This approach makes a few assumptions –

  • You have a market type classification system and you use it. My market type classification system works well for me but it may not fit you. If that’s the case, how would you go about describing and classifying market conditions? And you should really understand it and the implications of the meaning it is giving you.

  • You understand trading systems. You know the parts, the purpose of each, and how they work together well. You understand the system’s edge and the beliefs behind it that enable the system to profit.

  • You have a trading system development process and can develop one or more systems for each market type. Most people try to create a trading system that performs well all the time. If that’s what you have been trying to do, save your time and effort – focus on one particular set of market conditions per system.

  • You trade one or more systems created for the current market type. (Some trading systems may perform best in one market type but will perform acceptably well in one or two other market types also.)

Look at the market type. What’s the market doing right now? It’s going sideways with a normal amount of volatility. How long will it stay sideways? My market type describes the market now; it does not predict. The market could continue to go sideways, a bull market direction could resume but a quick transition to a bear market is equally possible now.

Until next month, this is Van Tharp.
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Trading Tip

April 2018 System Quality Number® Report
The SQN® Report
by Van K. Tharp, Ph.D.
Van's Photo
There are numerous ETFs that 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. I 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 Market SQN scores > 1.47
  • Light Green: ETFs with strong Market SQN 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 rating scale that we use for the Market SQN Score in the Market Update. The world market model spreadsheet report below contains a cross section of currently available ETFs; excluding inverse funds and leveraged funds. In short, it covers equity markets around the globe, major asset classes, equity market segments, industrial sectors, and major currencies.

World Market Summary — Equities & Currencies

Each month we look at the equities markets across the globe by segment, region, and sector.
The US Dollar is still a weak currency, but recently, it has regained a bit of strength. And since the world model is totally valued in the US dollar, everything should be increasing relative to the dollar.

Overall, the US market segments looked amazing three months ago and this month, they are neutral to bearish. The Dow reached a high Market SQN score of 4.5 and the S&P 500 was at 3.62 — both extremely high. But when they reach that high, it could be oversold time. At the end of April, the DOW Market SQN score is 0.07 and the S&P 500 is 0.15. Big changes from a few months back and both are now yellow.

The other America geography countries are brown (Canada), yellow (Mexico and Brazil) while Chile and Latin America are light green. Emerging markets are also yellow.

Asia is mostly yellow, but weaker than last month. Malaysia. Singapore, and Thailand are all light green, while everything else is yellow.

Europe also became weaker with no green countries at all and three brown ones — Germany (-0.09); Sweden (-0.19); and Switzerland (-0.28) All the rest are yellow.
SQN Chart 1
On the currencies side we have only one green (the Yuan at 1.25). We have several which are brown - the Aussie Dollar (-0.07), the Brazilian Real (-0.55), the Canadian Dollar (-0.19), the Swedish Krona (-0.70) and the US Dollar (-0.08). The US Dollar is still weaker than all the other major currencies so this is not a good climate to have a down equities market. Bitcoin in now neutral as well. It had a 69% drop followed by a 50% recovery, then another smaller drop and another recovery.

In the US stock market sectors last month, none were dark green and only one sector was light green (Software at 1.16). The rest are all neutral or bearish. Consumer Staples and Homebuilders are now red. Basic Materials, Financials, Industrials, Pharmaceuticals, REITS, Utilities, Food & Beverage, and Telecom are all brown. Even Volatility is now neutral. The US stock market is now neutral with a slight bearish tilt.

Commodities, Real Estate, Debt, and the Top and Bottom Lists

Commodities are a mixed bunch again. Timber is dark green. Blended Commodities, Oil, and Steel are light green. On the down side, Natural Gas is brown, as is Global Water, and Livestock is actually red. Everything else is neutral.

Interest rate based ETFs still look terrible and there are no exceptions this month. Junk Bonds, 20 year + Bonds, and TIPS are brown. All the rest are red as they were last month. This is not the time to try and hide in bonds.

Real estate across the board is neutral with the US and China being about equal.
SQN Chart 2
Looking at the strongest ETFs list, only two are above a score of 2.0 which is the same as the last two months but the ETFs are different. This month the top two are Floating Rate Bonds and Latin America. The rest of the top 15 are light green.

The weakest ETFs are all red but nothing is lower than -1.69. The worst performer in the database is Intermediate Term Bonds.


Let’s look at the summary table which measures the percentage of ETFs in each of the strength categories. You can see the distribution of the database by Market SQN score in bullish, neutral and bearish categories just below with the April 30th figures at the bottom of the table —
SQN Chart 3
We’ve moved from 65.7% of the database being bull or strong bull three months ago to 11.7% this month. And we’ve moved from 13.3% of the ETFs being neutral three months ago to 52% this month. We’re in a correction. This correction could continue sideways for a while or it could be temporary and move into a bull or bear market.

Be careful to base your actions upon what IS happening, not what you think might happen. The markets 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 because trying to navigate the 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 own beliefs about the markets.

Until next month this is Van Tharp.

Workshop Schedule

May 2018 - US
Three Opportunities in 2018 to transform
your trading and your life

  • MAY 18-20, CARY, NC ($700 Discount Expires Next Week)
  • JULY 13-15, CARY, NC
Workshop Objectives

Students will learn and begin to understand each of these objectives after attending Peak Performance 101:

  • How great traders approach their craft and learn a daily procedure that resembles what they do.

  • How you create your own experience in the market and how you are responsible for the results that you get.

  • Become more aware of some of your own psychological issues that affect your performance as a trader/investor.

  • Learn about expectancy, position sizing strategies and the power of big R-multiples through a simulation game. This game is also designed to help you observe your emotions in a setting in which only a small amount is at stake compared with what you will face in the market.

  • Learn some of the variables that affect your emotions and how you can gain control over them.

  • Learn to overcome self-sabotage through exercises done in the class.

  • Students will get guidance on how to develop an ongoing program to work on themselves using the Super Trader Program as a model.

  • Students will leave with a plan to make the maximum use of the workshop.

  • Participants in this course will get to meet and network with some really great people who a lot in common with each other.

June 2018 - US
The Basic and Advanced Options workshops have now been opened to the public (this workshop is traditionally a Super Trader Only workshop).
July 2018 - US
August 2018 - US
The Forex Trading Systems Workshop teaches three robust Forex Systems. All three systems are based on the concept of trend-following. Each system is based on similar “ingredients,” but each has a different recipe to capture a different part of the trend. Consequently, the systems are complementary to each other and together offer several trading setups nearly every day of the year. Two locations to choose from, Cary NC in August and London, England in October.

Trading in a Sideways Market
No matter what time frame you trade or what method you use to measure them, Sideways markets happen between 59% and 65% of the time! And even though they appear a majority of the time, Sideways markets are rarely discussed, even in professional trading circles. Until now....
September 2018 - US
The How to Develop Winning Systems Workshop teaches you what you need to know to develop your own system. The material you will learn is not market or time-frame specific. So whether you trade stocks, futures, currencies, gold, etc., or whether you place 50 trades per day or 50 trades per year, you will learn all of the components that work in any system. With this knowledge you can both modify existing systems to fit you or the market type better, or master your own system development.
Two locations to choose from, Cary, NC in September and London, England in October!
October 2018 - US
November 2018 - US

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