The Van Tharp Institute

February 07, 2007 � Issue #308

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In this Issue:


Exchange Traded Funds Workshop Coming in March

Feature Article

Market Update, Market in Yellow Light Mode, By Van K. Tharp


NEW WORKSHOP Professional E-Mini Futures Tactics

Update from Van

Trading Portfolio Update, Position Sizing Software Feedback

Trading Tip

Don�t Underestimate the Effect of Overnight Gaps, by D.R. Barton

Melita's Corner

It�s All in the Way You Phrase It, by Melita Hunt

View this newsletter on-line, or read back issues


Coming Soon

Highly Effective ETF and Mutual Fund Techniques

March 16-18, 2007

Raleigh, NC 

Presented by Ken Long

Most people are doing the exact opposite of what the big funds are doing and they pay a big price for doing so. For example: you put money into a stock after hearing that a fund manager really likes it.  However, by the time you hear about it, the fund manager is getting ready to sell.

But what if you could see what the big mutual funds are doing with their money well before they complete a transaction and jump in ahead of them? 

Learn More...



Tharp�s Thoughts

Market Update for February 7, 2007

1-2-3 Model In Yellow Light Mode

Van K. Tharp

Look for these monthly updates on the first issue of each month. This allows us to get the closing month data.  In these updates, we�ll be covering each of the major models mentioned in the Safe Strategies book:  1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our four star inflation-deflation model; and we�ll be 4) tracking the dollar.

Part I:  Market Commentary

The market seems to be replete with conflicting information.  On the one hand, I have sources that tell me people have cash that they just don�t know what to do with.  For example, someone bought a New York building that was full (with ten year leases) at a rate of return that was about 4% (less maintenance costs).  Why would one spend billions on an illiquid asset like that when you could do better with treasury bills?  But this seems to be the state of the market.  The baby boomers are still pouring pension money into the market (and that should continue through April 15th), so the market has lots of cash.  In addition, the Fed has stopped raising rates (and may even start reducing them in the near future) and many pundits are saying that the market is undervalued at current levels.

At the same time, I hear other market gurus saying that the market is overvalued and due for a major correction at any time now.  Just wait and see.  This one might fit with the secular bear market scenario (which I believe) that says valuations (not prices) will continue to go down for the next ten years or more. 

This is all the more reason why the best traders just watch the market and act based upon what it is doing right now.  And right now the market looks pretty good.  Our model portfolio, which I report on in the middle of each month, is mostly long and efficiency levels, as discussed later in the update, are positive.

Part II: The 1-2-3 Stock Market Model IS IN YELLOW LIGHT MODE and that�s good for stocks

As I said last month, the Fed stopped tightening a little over six months ago, so we can now say the �the Fed is out of the way.�  And that officially occurred on December 29th.  Under red light mode, stocks typically go up, although not massively.  The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.

Let�s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year.  This is given in Table 1.

Table 1: Weekly Changes in the Major Averages 
   Dow 30  S&P 500  NASDAQ 100 
Date  Close  % Change  Close  %Change  Close  % Change 
Close 04  10,783.01    1,211.92    1,621.12   
Close 05  10,117.50 -6.17% 1,248.29 3.00% 1,645.20 1.49%
Close 06  12,463.15 15.58% 1,418.30 13.62% 1,756.90 6.79%
5-Jan-07 12,398.01 -0.52% 1,409.71 -0.61% 1,785.30 1.62%
12-Jan-07 12,556.08 1.27% 1,430.73 1.49% 1,844.81 3.33%
19-Jan-07 12,565.53 0.08% 1,430.50 -0.02% 1,796.81 -2.60%
26-Jan-07 12,487.02 -0.62% 1,422.18 -0.58% 1,772.97 -1.33%
2-Feb-07 12,653.49 1.33% 1,448.39 1.84% 1,798.13 1.42%

The market is continuing to rise and everything is up on the year.  Last week included some excellent gains and my guess is that those gains will continue during February.

As of the close of the year, 71.4% of the market consisted of positive efficiency stocks.  As of February 2nd, it was 77.3% positive efficiency, which is the strongest I�ve seen it since its prior peak in February 2005. 

Part III: Our Four Star Inflation-Deflation Model

I strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics. 

So far our models have been telling us, that inflation/deflation is pretty steady, with a slight inflationary bias, and that�s where secular bear markets tend to start. 

So what�s our new indicator telling us about inflation?  I�ve described the inflation model I�m using in these updates for over six months now, so instead of continuing to list the criteria here each month, click here to read more if it is new to you or you don�t understand it.

Okay, so now let�s look at the results for the last six months. 






December 30  2005





June 30 2006





July 3  2006





August 31 2006





September 30 2006





October 31 2006





November 30  2006





December 29 2006





January 31 2007





We�ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
October Lower Higher Higher Higher Higher Higher Higher Higher  











The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom.  The model once again shows that inflation is winning slightly.

However, let�s compare real inflation as measured by the CRB versus the government�s measure of inflation as measured by the CPI.  These are shown for 2005 through 2006 in the next chart.  Notice that the CPI has hardly moved, while the CRB has gone up about 33% over the two years.   

Part IV: Tracking the Dollar

The U.S. dollar is still looking weak.  It was relatively flat for about six months and then it started a major fall against the Euro, which is still going on.  This is another reason why the Federal Reserve needs to keep rates high. When interest rates are high, people are attracted to the dollar.  But when rates are falling, they will dump it quickly.  The IMF has already said that the dollar, at current rates, is 35% overvalued.  Can you imagine the impact of the dollar falling another 35%?  Incidentally, I get my data from a government website.  And to my surprise, the numbers had totally changed from the last time I looked at it.  All I can do is assume that the government decided to change their measure in some way.  I�ve changed the chart below to reflect the government�s updated figures.  Perhaps the government was worried about critical support levels and did some statistical changes in the index. 

The Dollar Index


Dollar Index

Jan 05 81.06
Jan 06 84.29
Feb 06 85.05
Mar 06 85.01
Apr 06 83.88
May 06 80.63
June 06 81.51
July 06 81.94
Aug 06 81.18
Sep 06 81.59
Oct 06 82.36
Nov 06 81.49
Dec 06 80.89
Jan 07 82.37

Earlier, I pointed out that the falling dollar had attracted the Economist magazine to feature it on the cover.  Covers tend to make good contrary indicators and the market is now higher than it was when that cover came out in November. 

Right now there is no currency around to replace the dollar.  It�s not going to be the Euro and I don�t think any major Asian currency is close to becoming the world�s reserve.  However, my guess is that the Yen is a good candidate for becoming strong in the near future.

Until the March update, this is Van Tharp. 

About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom 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


New Professional E-Mini Futures Tactics Workshop

March 3-5, 2007

Raleigh, NC

Presented by D.R. Barton, Jr.

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  • Learn how pro traders take consistent profits from the e-mini markets.
  • Don't become one of those traders who tries futures trading and loses a bundle by trading like the herd.
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Updates from Van

Trading Portfolio Update

Today we were stopped out of our new short position in the efficiency portfolio.  Since the market is becoming extremely efficient right now, I�m going to replace it with a very hot positive efficiency stock PLRO, which we will take at the closing price today.  I�ll give you a full report in two weeks.  However, all of our positive efficiency stocks are doing very well right now.  Hopefully, with this change we will have no losers when I next cover the portfolio.

Software Update

I appreciate all of your offers to review software having to do with position sizing.  So far I haven�t had anyone mention Trading Recipes (so I assume it is no longer being used).  I also haven�t had anyone mention Trading Blox or Wealth Lab, although a lot of you have mentioned those on the Van Tharp Forum.  Thus, if anyone is using these products and would like to review them, I�d appreciate it.  I�m no longer looking for a 1000 word review.  Instead, I want you to simply fill out a questionnaire that consists mostly of checkmarks. Explanations are required in only a few instances.

So far I�ve had responses on the following software:

  • MTPredictor

  • TradeSim

  • AmbiBroker

  • McSim

  • Excel

  • Omni Trader

Thus, if you are using something else for your position sizing, and would like to fill out the questionnaire for us, please let me know by emailing [email protected]

Lastly, thank you to all of the people who have offered to create a position sizing product for me. We obviously have a lot of computer programmer/traders out there. However, I would like to re-iterate that the Van Tharp Institute is NOT in the software business.

I�ve already gone down the route of developing software and we have NO intention or interest in doing it again. Nor do I have the time to be involved in software development, testing or reviewing.

My staff is NOT equipped to deal with the technical problems that come up with software or even to answer questions on software.  That is just not what we do.  Our focus is on helping you through education, modeling, and psychology to become the best trader you can be.


Trading Tip 

Don�t Underestimate the Effect of Overnight Gaps 

By D.R. Barton

�If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.� � George Bernard Shaw

Many traders fail to see the allure of day trading.

I understand that well.  �Sitting in front of a computer� is not the way most people would describe their fondest of times.  But when day trading is structured properly, it can be a much different experience than a daily grind in front of a screen.

And for serious traders and serious students of trading there is one over-riding factor that makes day trading particularly attractive -- the lack of overnight risk.  Big news can and does happen when the markets aren�t trading.  And one of the dirty little secrets of trading is that most traders and investors underestimate the immense impact of unexpectedly large losses.

Over the years I�ve heard many stories of accounts that have been blown out.  And almost every story revolves around one or two trades that went bad � moves much bigger than anticipated with position sizing that was too big and didn�t account for the huge move.

Very few traders properly account for the impact that overnight gaps can have in their trading results.  News that sends price flying away from your direction can happen in any number of ways.  Macro events, like war, civil unrest or weather disasters can have big impacts.  As can micro events like earnings preannouncements, SEC investigations, management turnover and negative product news.

And if any of these things happen when the markets are closed, there�s really nothing a trader can do but wait until the open and take their medicine.

Which brings me back to why day trading is so appealing to me and many others:  It virtually eliminates the impact of event risk.  A bad fill may happen in a fast market, and there is even an occasional trade stoppage on individual stock because of intraday news.  But in reality, 95%+ of the risk of big moves against you is eliminated when you exit trades at the end of the day.

This characteristic of reducing the risk from big events gives several advantages to day traders:

  • More aggressive position sizing.  Day traders can use this reduction of inherent risk to use larger positions and grow their capital more quickly.  This is, of course, a double edged sword that cuts both ways.  But given a positive expectancy system, traders can use their edge to a greater advantage when day trading,

  • Greater leverage.  In both equities and futures trading, brokerages give their customers more leverage on their account assets to reflect the reduced risk that is associated with intraday trading.

  • Reduced stress.  Very few people consider the fact that day traders don�t have to worry what happens overnight or over the weekend � because their positions are flat.

Statisticians have been trying to characterize markets for decades with theories like �fat tails on distributions.�  Next time we�ll look at a couple of the prevalent theories and which one make the most practical sense for traders.  Until then,

Great Trading! 


D. R. Barton, Jr. will be teaching our New Professional E-Mini Futures Tactics Workshop, March 3-5, Raleigh NC.  He will be joined by ace trader Christopher Castroviejo. To see what D.R. said about Christopher last week, click here.

A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world. 

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on and Financial Advisor magazine.


Melita�s Inspirational Corner

It�s All in the Way You Phrase It

by Melita Hunt

When I awoke Monday morning, I felt exhausted. It was my first day back at work after a ten- day whirlwind tour of the US. I had returned to Raleigh on Friday, went from the airport straight to a meeting and then hosted and finished organizing the 3rd Annual Bachelor Bid for Charity which was held on Saturday night. 

It was an awesome event with over 350 people attending (mostly women of course) and we raised a ton of money for the homeless women and children in our community. I was running around like a maniac, but was amazed that we pulled it off in the manner that we did. The night was a huge success!

So now I am going to change the word that I wrote in the first sentence from �exhausted� to �exhilarated� because that is how I really felt. 

When I awoke Monday morning, I felt exhilarated. Yes I was tired, yes it had been hectic, but I felt great and I was filled with a level of satisfaction that I haven�t experienced for quite some time. 

It is because the last two weeks have been about focusing on other people. They have been filled with laughter, love, memories and friendship as I traveled and experienced the USA with a childhood friend and it all culminated in a team of over 50 wonderful people (bachelors and diva�s) working together for the homeless. Because of this team effort, many children won�t be sleeping in cars or on the streets this winter. 

So who has time to be exhausted when it�s just as easy to be exhilarated?

It�s all in the way that you phrase it!

You can contact Melita at [email protected]

Join in the discussions on our blog and forum and MasterMind Trader Forum


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