There are more “yellow flags” signaling caution in the market than we’ve seen in many years.
#900 July 25, 2018
  • Feature: Market Health Check — Is There More Than Big Tech Keeping Us Afloat?, by D.R. Barton, Jr.
  • Workshops: 5 London Events, October
  • Tips: The Flow of the Markets, by Van K. Tharp, Ph.D.
  • FREE BOOK!: Trading Beyond the Matrix
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1- $700 Early Enrollment Discount: This discount is in effect right now on both August (Cary, NC) and October (London, UK) workshops.

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4- Variety of Discounts: Attend another VTI workshop scheduled back to back with Forex and get additional combo discounts for attending more than one three-day workshop.

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Feature Article

Market Health Check —
Is There More Than Big Tech Keeping Us Afloat?
by D.R. Barton, Jr.
DR's Photo
In the mid-1990s, I was working at DuPont and I was very lucky to have a great mentor. He had led the launch of DuPont’s Stainmaster brand and he knew more about product development than anyone I have ever met.

At the time, I was running DuPont’s industrial composites business and I was inexperienced managing a broad line of products. At my first monthly business review with my team, we covered a broad swath of business metrics — safety, employee issues, supplier and environmental concerns, profits and losses and new product development. After that meeting, my mentor took me aside and gave me some sage advice. He said, “All the numbers you reported are important and they need to be managed. But you have to let your people know what the main barometer is — the one that tells everyone whether the business is healthy or floundering. For most businesses, that’s the bottom line — profit. As an incubator business, your health is about growth. If you’re not growing, then we have to get out of the business and use the resources elsewhere. So concentrate on the growth numbers and spend less time on the others.”

Fortunately, the business was growing — I was just letting the growth numbers get lost in the jumble of other metrics. So following my mentor’s guidance, my next report and the others afterwards did not ignore other important numbers but concentrated on our main barometer, growth. As a result, I received kudos from everyone.

Like my days at DuPont — I keep my eye on lots of numbers and indicators but I concentrate on the leading barometer of the market’s health — the thing that’s akin to the sales growth in my composites business — market breadth. Last fall, I likened breadth to a “canary in the coal mine” in my article on the topic.

My favorite way by far to see whether the canary has started to feel queasy is to watch the cumulative advance/decline line. As a quick reminder, this indicator starts with a daily breadth number. Breadth is the number of stocks on the New York Stock Exchange that closed higher than yesterday minus the number that closed lower. That’s where the term advance/decline comes from. When we sum that breadth number day after day, we “accumulate” the daily breadth numbers, giving us a cumulative advance/decline (A-D) line.

Most of the time, when the market goes up or down, the cumulative A-D line moves in lockstep. When they disagree or diverge, we get interesting information from this old friend. In the past, I’ve shown charts of how well the cumulative A-D line pointed out major turns in the market:
D.R. Chart 1
It’s interesting that we saw a cumulative A-D line divergence in late 2015 before the August correction. I call it interesting because that was a micro case of the other big turns on the chart above but it’s very illustrative. That’s a time when global financial markets, especially China, were struggling. China was down over 30% from its peak in just a matter of 3-4 months. And yet the U.S. markets continued to climb, fueled by the great run of the FANG (Facebook, Amazon, Netflix, Google) stocks. And a look at the market breadth showed that those few stocks weren’t just leading the market, they made up almost all of the gains that summer. The reckoning came in August when the S&P 500 dropped more than 15% in just five trading days.

Today’s FANG + Breadth Story

I’ve heard similar concerns recently — that the FANG stocks are all that are holding this market up. (These days, we have to stretch FANG to FANGMA to include Microsoft and Apple.). But is that the case? On Fox Business Network’s Varney & Co. program and Bloomberg Radio just last week, I answered that question with the following response and data.

The short answer is that the six big tech stocks are leading the market right now. But unlike August of 2015, lots of other stocks are also following along. First, let’s look at some compelling statistics about all the stocks in the S&P 500:
  • The S&P 500 is up 4.77% as of Friday (July 12). That index is market cap weighted, meaning that the largest stocks get their gains and losses multiplied by a much bigger number.

  • If the six tech megacaps were doing all the heavy lifting (responsible for most/all of the gains), we’d see the equal weight S&P 500 index faltering significantly.

  • While the equal weighted S&P index is lower, it still has a 3.1% gain for the year.
    • To re-iterate, that’s the S&P return if each of the FANGMA stocks were weighted the same as every other stock in the index — where Apple gets the same weight as Mattel or H&R Block … so FANGMA stocks are leading, but not making an unusually large difference.
    • In fact, dating back to 1996, the current difference between cap weighting and equal weighting is within 1x standard deviation — so it’s within normal fluctuations.

  • Other numbers of interest:
    • Stocks in S&P 500 with double-digit (or higher) gains for 2018 = 143
    • Stocks in S&P 500 with double-digit losses for 2018 = 91
    • That’s 57% more stocks with double-digit gains than double-digit losses!
    • Winners vs. losers in the S&P 500 for the year: 265 vs. 240, or 4.2% more winners than losers — in line with overall gains… (For info, there are currently 505 S&P stocks because of double listings of multi-class stocks like GOOGL & GOOG)

  • So breadth (# of stocks participating on the upside) is consistent with market returns and not as unbalanced as many have speculated.

Let’s see how all of this plays out in our current cumulative A-D chart:
D.R. Chart 2
So we see that breadth helped us form an expectation of more upside after the late March to early April retest of the February lows. With this last push up into later July, there is still broad market participation even with big tech still leading the way.

However, this does not make everything rosy. Actually, I believe we have more “yellow flags” signaling caution in the market than we’ve seen in many years. But following the trend is a prudent course. As long as breadth and other indicators tell us this party is still going, you can keep buying the pullbacks and riding the trend.

I always love to hear your thoughts and feedback — just send an email to drbarton “at”

Great Trading,
D. R.
Attend Forex and Sideways back-to-back in August to
save up to $1,000!
Instructor Kim Andersson discusses some of the objectives of her upcoming workshop "Sideways Market Strategies" in the video below.
video - sideways

Trading Tip

The Flow of the Markets
by Van K. Tharp, Ph.D.
D.R.'s Photo
In this week's tip we resurrect an "oldie-but-goodie" from when Van wrote for Stocks and Commodities Magazine. The advice is timeless and still holds true today.
Imagine yourself flowing down a river, only you don't know that you are. You do, however, notice that when you move in one direction, with the flow of the river, you move rapidly. When you move in another direction, against the river, you move slowly or not at all. In fact, when you go in that direction, you seem to put out a lot more effort just to stay in place. Your life becomes a struggle. It just seems to push you in another direction. Feeling miserable, you fight against it. But it doesn't help. You still seem to move only in one direction — with the flow of the river.

Most people prefer to struggle against the river. They try everything they can think of to go upstream. All solutions like this — going against the flow - have the same result: frustration. If you were in the river, what could you do to make your life easier? One solution would be to get out of the river. But that would be giving up. There is only one easy solution, to acknowledge or accept that the problem has nothing to do with the river. The river just is, and it moves downstream and nothing you do can change that. When you realize that the problem stems from you, then the solution becomes obvious. Just relax and flow with the river.

Buy High, Sell Low?

One of the oldest adages in market psychology is "Don't be afraid to buy high and sell low." Let's analyze what that means. If the market price is high, then the market is moving up. Those who are afraid to buy because the market is too high are fighting the flow of the river. It is possible the river may change direction, but you cannot predict if it will by determining how long it has been flowing in a particular direction. It may continue in the same direction for an unspecified length of time. Then again, if the market price is down, it also indicates the direction of the flow of the river. Those who are afraid to sell, once again, are fighting the flow.

Whether you go with the flow of the market or struggle against it, the market will continue to flow, taking you with it one way or another.

Why do traders resist the flow of the markets? They do so because they play psychological games with the market. The most common game involves not being willing to give up what you perceive to be control, the need to be right, although you have no control over the market flow.

When you are struggling with the market, the struggle becomes all consuming. You don't realize that you are struggling with the market. Instead, you find yourself always looking for some solution to overcome the struggle. The struggle obscures the obvious solution: Letting go.

For example, suppose you have a tendency to be in a perpetual market bear, always expecting the market to go down. For you, every little turn in the market is evidence that the market is turning. As a result, you always go short and consequently, take a beating. You repeat the process, over and over, until the market actually turns down. With each transaction the struggle against the flow of the market intensifies for you.

Even worse is the trader who refuses to accept the inevitability of eventual loss. The market moves against each position the trader takes, but he refuses to go with the flow and refuses to accept the loss, no matter how small. It is an affront to the trader's ego. As a result, he refuses to accept it and the loss becomes larger. The bigger loss is even harder to take and the trader again refuses to accept it. The struggle continues until the loss becomes so overwhelmingly large that the trader has no choice but to take the loss.

The solution to the problem of resisting market flow is to realize that the problem has nothing to do with the market. The problem stems from you, the trader. The market is not going against you personally. The market is simply moving. Whether you go with the flow of the market or struggle against it, the market will continue to flow, taking you with it one way or another. Market flow is bigger than any individual trader. The question is whether you realize how you are creating your struggle against the market. When you push against the market, the market seems to push back. But the market is not the problem.

The trader's struggle with the market is the problem.
Two Dates - Two Countries
Forex Workshops

August 11-13 in CARY, NC

October 20-22 in LONDON, ENGLAND


August 2018 - US
$700 Discount Ends Next Week
Enroll now!
The Theory: All You Need to Know About Forex

Gabriel will spend most of the workshop teaching his trend-following systems. The first half day is spent to go over the specifics of trading the Forex market and cover such topics as:

  • Why trade Forex?
  • What are the advantages and drawbacks of trading Forex versus other instruments?
  • What are the main market characteristics, and who are the Forex market participants?
  • What methods work best in the Forex market?
  • All you need to know about Forex trading sessions and the currency pairs.
  • How are Forex chart characteristics different than stocks or futures?
  • What do you look for in a Forex broker? What do you avoid?
  • Why Forex may actually be the best market for new traders to learn trading.
  • What are the trading edges that work in Forex?
  • The Method

Gabriel will discuss a number of Forex trading ideas at his workshop and teach three specific trading systems. All three are trend-based; you can see the price action patterns in the price charts. His systems can be traded in various timeframes and can be traded across a wide range of currency pairs. Attendees of Gabriel’s workshops enjoy swing trading the systems using primarily 5-min ,15-min, 60-min and Daily candle charts. The trades usually tend to evolve over a timeframe of anywhere from several hours to a couple of days (or even weeks, in the case of strong trends).
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....

Kim is a 2015 Super Trader Graduate from VTI. Before she completed her studies with us, she had earned a Masters in Systems Engineering - which is no small feat! She has also served as an IT Security Consultant to the Pentagon, while also performing her duties with the Canadian Air Force.

She currently works as a Cyber Security Engineer at Lockheed Martin/Leidos and trades her systems part-time, finding a work/life balance that works for her and her family.

With over 1,850 trades completed, Kim has the solutions AND THE EXPERIENCE to lead you in a Sideways Market.

She has put in a tremendous amount of work and effort in to bringing this unique training out into the open. Originally designed with our Super Traders in mind, Kim and I decided to develop this material so that all traders or investors could come to the workshop and take home this critical information on this underappreciated market type.

This means that enrollment is limited as many seats will be filled with students from our elite Super Trader program.

If you think you are ready for a fast-paced, hands-on event hosted by an instructor, 100% dedicated to teaching you how to effectively trade Sideways markets, make plans to join us this August 17th-19th.
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!
Peak Performance 202 is SOLD OUT!
Check back next week to see if any more seats become available.
October 2018 - US
November 2018 - US

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