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Market Update for the Period Ending November 30th, 2011
Market Condition: Bear Volatile

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.

If your beliefs are not similar to mine, then this information may not be useful to you. Thus, 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 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 and readable on our web site), 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. Beginning this month, 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. —Van K. Tharp

Part I: Commentary—The Big Picture

I haven’t shown this graph lately, but it really sums up the big picture, and it is not likely to change much very soon. This graph charts the US federal debt from 1900 to 2020.

It only shows the federal debt and none of the unfunded future obligations such as social security and Medicare. Estimates for the total federal debt and unfunded obligations reach $100 trillion or more. This is the situation in the US. It has to change because nothing that I can think of ever keeps going up asymptotically.

Part II: The Current Stock Market Type Is Bear Volatile

Each month I look at the market SQN® score for the daily percent changes over 100, 50 and 25 days. For our purposes, the S&P 500 Index defines the market. The 200- and 100-day SQN scores are bear, while the 50 and 25 are both neutral. The 100-day SQN score is shown in the graph below.

chart 2

The next graph shows the market volatility over the last year.

chart 3

Volatility has decreased a bit since its peak in mid-August. Very volatile conditions, however, could still develop quickly. Look how fast volatility rose in that early August period. This is what I would call a sloppy bear market. It lulls you into thinking it might be time to get back into the market, and then you lose 10% in a few days.

Here are the performance figures for the three major US indices on a weekly basis over the last month. The Dow and Nasdaq 100 are up slightly for the year and all of it is due to the performance last week. Considering we’re in the last month of the year, what you are seeing is typical of a very nasty market.

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%
2-Nov-11 11,836.04 2.23% 1,237.90 -1.57% 2,318.32 4.53%
9-Nov-11 11,780.94 -0.47% 1,229.10 -0.71% 2,314.10 -0.18%
16-Nov-11 11,905.59 1.06% 1,236.91 0.64% 2,324.37 0.44%
23-Nov-11 11,257.55 -5.44% 1,161.79 -6.07% 2,166.54 -6.79%
30-Nov-11 12,045.68 7.00% 1,246.96 7.33% 2,295.20 5.94%
Year to Date 12,045.68 4.04% 1,246.96 -0.85% 2,295.20 3.49%

Part III: Our Four Star Inflation-Deflation Model

In the simplest of terms, inflation means that stuff gets more expensive and deflation means stuff gets cheaper. There’s a correlation between the inflation rate and market levels, so it’s of use to traders’ big picture processes. Given these times, it’s not so easy to tell as there are crosscurrents of both inflationary and deflationary forces at work.

November presented another mixed message in this area and, actually, neither of the two competing forces has dominated the other yet. When a large percentage of the world’s wealth disappeared in the equity crush of 2008-09, that was deflationary. But the Federal Reserve has been printing money like crazy, and if the banks had lent it, the effect would have been quite inflationary. You do see some inflation in food prices, gas prices, and the prices of other things you buy each day.

Here is my four star inflation-deflation model over the last few months and 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  
Apr 11 687.66 40.87 1,535.50 16.38 2.5
May 11 656.42 39.75 1,536.50 15.84 2.5
Jun 11 632.23 39.37 1,500.30 15.35 0.5
Jul 11 645.77 38.01 1,628.50 14.80 0.5
Aug 11 661.93 35.34 1,813.50 13.38 0.5
Sep 11 571.38 29.36 1,620.00 11.81 -0.5
Oct 11 604.28 34.45 1,724.20 13.50 -0.5
Nov 11 584.22 34.53 1,746.00 12.81 +0.5

Looking back over two-month and six-month time periods provides the current month's score.

Month CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
  Higher Lower Higher Lower Higher Higher Higher Lower  
Nov   -0.5   -0.5   +1   +0.5 +0.5

We’ve moved back into slight inflation. However, I want to point out that part of the reason that we are not seeing massive inflation is that the banks are not lending. I’ve said this before, and it is illustrated in the next chart. I usually show the short-term graph. This graph clearly shows banks lending at about 70% of what they have in reserve. The normal multiplier effect is about 300% as shown in the graph.

chart 4

Part IV: Tracking the Dollar

In October I got a pleasant surprise. I was in India and got 50 Rupees to the dollar. And it actually has risen as high as 52. This was a rare exception to the Tharp effect in which the dollar goes down when I travel abroad—especially in the country to which I travel. Much of that rise was due to the crisis in the Euro (which could fail before the dollar, if that is saying much). So let’s look at a chart of the dollar index in the futures market.

chart 5

As you can see, it made a top in October. It made a second top at about the same price and is now going down. Double tops like this usually suggest that the ride is over, but that may depend on the situation in Europe.

General Comments

Europe is in the midst of a banking crisis. Most banks in the US are not in very good shape either. Notice the XLF index trend above in the inflation/deflation table. Better yet, here is a monthly chart of XLF going back six years. It’s not pretty unless you’ve been short the banks (which isn’t easy to do) or XLF.

chart 6

XLF had a huge fall in 2007 and 2008, but not many people noticed 2007. It bottomed at the bottom of the big bear market, but it never recovered much, and it’s been going down most of this year.

My guess is the United States will do its best to keep the Euro alive because its failure would kill the US economy as well. But helping Europe will just put more pressure on the dollar and the debt of the United States government. Many more banks will fail either way. You might notice that almost every major airline has gone bankrupt in the last 25 years, with American Airlines being the latest.

A trading approach will work better in this market rather than an investing approach. Even for traders, though, the sudden and substantial moves in this market environment can be challenging. If you don’t have the trading systems and the temperament to handle the volatility in the equities (and debt!) markets right now, sitting in cash (i.e., keeping your capital) may be a viable alternative to trying to grow your capital in a bear volatile market.

These monthly market updates are not for predictive purposes but rather 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? That question implies that you have multiple trading systems and that you know how they perform under various market conditions. If you haven't heard that concept before or the other ideas mentioned above, read my book Super Trader, which covers these areas and more so 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. 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, Dr. Van K. Tharp is widely recognized for his best-selling books and his 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  


Trading Education


Trading Tipvan

November 2011 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.   As a result, 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 SQN 100 score uses 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, which are not as strong as the green ones (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 consists of 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

In October, there were only a few red areas—most of the ETFs were brown and yellow.   At the end of November, things don’t look any better than last month. The model now shows mostly brown and a number of yellow areas. 

First, let’s look at the countries, US indices, the major market sectors, and currencies.   Everything is either brown or red with a few exceptions: the volatility index (VXX) is still green; utilities seem to be the strongest sector; the Japanese Yen looks like the strongest currency with the US dollar being second.  Other than those, everything else is brown or red.   

Are these the kind of market conditions in which you want to invest?  If you are someone who thinks this market is a bargain, remember how long it has been this way as well as the fundamental conditions behind it.  Do you still want to invest long term in anything right now?  I hope not.  This market is best-suited for swing and day traders.

Every country is red, except Japan, which is brown.  And almost every sector is red, with the exception of consumer staples, health care, retail, REITs, food and beverage, Internet architecture, and Technology in the US.  Still, these are all negative and brown.

Not a single country ETF was yellow or green.  In the US, the NASDAQ index, represented by QQQ, was the strongest (but still not very strong) market segment at an SQN score of only 0.34.  Most of the other US market segments remain brown. 


The next table shows the relative performance of commodities, real estate, and interest rates on the left hand side with the strongest and weakest areas of the all of the ETFs.   Here we see some greens, but it is all in bonds and the VXX.   In a nutshell, this shows you where all the money in the markets has gone.  

Interest rates are at extreme lows, and the amount of debt is very high.  Interest rates, therefore, must explode at some point in the future.   Yet big money has fled to interest rate products for “safety.”  Isn’t this a bit ironic?

Safety is not found in an asset class but in smart trading.  

On the commodities side, everything looks quite weak—most areas are red.   We have two brown areas (i.e., silver, and surprisingly, real estate) and two yellow areas (i.e., gold and livestock).


What's Going On?

My world model SQN® scores give you a clear snapshot of what is going on in the markets.  While we have record low interest rates, lots of money has fled to a very dangerous place: government bonds.  There are no exciting long-term investments in sight. On a short-term basis, what might be promising today could be a money loser tomorrow.  But that is the climate we have in the world economy.  

“Things remain serious.”

Crisis 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 such an education is hazardous to your wealth.

Until next month, this is Van Tharp.  Take care and trade well.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his 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  


Viewing Previously Confusing Charts with Clarity

Having studied four volumes of the Peak Performance Home Study Course, there's been a noticeable change in the way I see, hear, and read. Working as a nurse, I am constantly challenged with various behaviors. I now sit back and observe my surroundings from a distance to assess how to approach each situation prior to opening my mouth. Remarkable.

At first I followed your advice to stop trading. However, having now completed Book 4, curiosity got the better of me. Today I opened my charts for the time since early October. I did not place a trade, nor did I have the intention. I just wanted to satisfy my curiosity as to how I would view my charts.

I had been trading 4-hour charts not long prior to that 5 minute. Even before starting the Peak Performance course, I realized my time frames were not correct for long-term profitable trading. Well I opened my chart, EUR/AUD, just looked at it. I removed some of my indicators rendering my chart basically naked, then moved to a weekly chart. Previously weekly charts made no sense to me. Today, at least, I viewed my charts with clarity.

Wow! Looking forward to completing Volume 5. Very keen to go live again.

—D.C. Duggan

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December 7, 2011 - Issue 555

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