I�d like to make a comment about these
monthly updates that I have been doing ever since Safe
Strategies for Financial Freedom was released in 2004.First, these updates reflect my beliefs.If my beliefs and your beliefs are not the same, then you
will not find them useful.
Second, I continue to do them because they
are useful for me and my trading.And I hope they are useful to those of you who like to be
updated and appreciate the information that follows.However, as I said above, if your beliefs are not similar to mine, then they
are probably not useful at all.Thus, if you are inclined to do some sort of intellectual
exercise to prove one of my beliefs wrong, simply remember that
everyone can find lots of evidence to support their beliefs
and refute others.Just know that I admit that these are my beliefs and that your
beliefs might be different.
These monthly updates are published in the
first issue of Tharp�s Thoughts each month and are based on the
closing month�s data.These
updates cover each of the major models mentioned in the Safe
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 4) U.S. dollar tracking; plus one new
thing that wasn�t in the book, 5) the five strongest and weakest
areas of the overall market.
Part I:Market Commentary
The subprime crisis continues to exert itself
on the markets worldwide and, in my opinion, we are probably
beginning to see the second downleg of the secular bear market.This one could be very nasty.We definitely seem to have a strong inflationary environment
and a bear market in such an environment can be nasty indeed.
Last month, I showed that with real inflation
and the decrease in the value of the dollar, you needed to make 20%
on your investments just to break even.Gold did this and stock markets in countries like China,
India, and Brazil did much better.However,
even they are affected by the subprime crisis because when a lot of
assets are suddenly worthless, other assets need to be sold to
maintain some liquidity and, in my opinion, this is what the markets
are facing right now.
Part II: The 1-2-3 Stock Market Model Is
in RED LIGHT MODE and That�s Bad for Stocks
The 1-2-3 Model is clearly in a red light mode
and that�s not good for the stock market.The Fed is not in the way and has actually started to lower
positive.The market is
acting poorly and the PE ratio of the S&P 500 is above 17, both
of which are negative. Thus, we are in red 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.These data are given in the table below.Notice that the market has now undone, in two months, all of
the gains made in 2007.
The market has also returned to more normal
getting questions from the media on what investors should do with
this high market volatility.But
my research showed that over many years the S&P 500 made weekly
changes of over 2%.Then
during the last upward phase, we had very quiet markets.But now that the markets are moving back to normal ranges,
people are anchored by the recent past and think that these are
What�s really going on?I personally think that a lot of financial institutions are
in big trouble because of the subprime crisis and they must sell
whatever they can to get cash, and that includes many of the best
investments for this particular period of time.When they run out of assets to sell, then things will return
to a more normal inflationary bear market scenario.But these are huge institutions.We may see some banks crashing before it is over, and I�m
not the first person to say that.
When we look at the strongest and weakest
areas of the markets, it seems to be mostly commodities, with even
the strongest country ETFs taking big hits.
The five strongest components, in order:
The five weakest components, in order:
(20)-- this is where I
am as I�m writing this.
Remember when the Chinese stock market led
the list for much of last year?Also notice that while Gold is very strong, gold stocks are
not.But I think this is
due to the liquidity problem produced by the subprime crisis.
Part III: Our Four Star
As I�ve stated many times in these monthly
updates, we are in an inflationary bear market.The bear market is not necessarily reflected in prices, but
in PE ratios.PE ratios
will continue in a downtrend even when the Dow makes new highs.And the inflation is obvious, but simply masked by government
statistics.Okay, so now
let�s look at the results for the last six months.And remember that the Fed has now chosen to produce inflation
and a strong dollar devaluation over the pain of the subprime
now look at the two-month and six-month changes during the last six
months to see what our readings have been.
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
here for more information on the model.
of this writing, Gold is now at $971 per ounce (a tremendous
increase even since last month).In addition, the CRB is also hitting new highs.Incidentally, the figure I�ve been using for the CRB index
is the CCI (the old CRB), which is a much more accurate
representation of the commodity market.I have been using this index for some time.
is a time to be in commodities and real assets, such as precious
metals, and top quality collectables such as rare stamps, which
we�ve talked about previously in this newsletter.If you know where to look, you may find the beginnings of
real estate bargains.Commodity
and gold stocks are probably good value plays because they are going
down as big institutions must liquidate some of their best
stocks have been down for months while gold keeps setting new highs.And gold stocks are really leveraged gold plays since they
value gold at much less than the current price of their assets.
I�m also going to include the latest publicly
available statistics on inflation from John Williams (www.shadowstats.com).According to Williams, inflation is running at over 11% and
M3 (another measure) is running at over 15%.
Part IV: Tracking the Dollar
With the Federal Reserve lowering interest
rates, I expect the dollar to be really weak now.Who wants to buy treasury bills as the interest rate gets
lower and lower?So
expect currency traders to start selling the dollar and moving to
currencies that pay a better interest rate.Look at the data in the chart because it really says it all.
I�m currently on a world tour.Last time I was in Singapore, which really likes to keep
their currency fairly even with the US dollar, a US dollar was worth
over $1.60 Singapore.Now
it�s worth less than $1.40.And
costs, especially for Americans, have gone up dramatically here.
Always remember that crisis means
the NASDAQ could be a good long term move, while being long gold,
commodities, and oil has been very profitable.However, you need to always be aware of �What is the market
doing right now?� � rather than what was it doing last week.
Until next month�s update, this is Van
Tharp: Trading coach, and author, Dr. Van K. Tharp is widely
recognized for his best-selling book Trade Your Way to
Financial Freedom 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 www.iitm.com.
people may be there to help us, teach us, guide us along
our path, but the lesson to be learned is always
you ever noticed that trading lessons show up in all sorts
have stumbled upon them while playing golf, while both
playing and watching poker, and while teaching economics
to third graders.I
have found another good one in a much more traditional
played a most interesting money game this week.I�m at a fairly large conference (~300 people)
that is focused on growing businesses.It involves some modeling of other business leaders
and some pretty deep personal work.
the interesting game came when the whole group was told to
bring money to a game after the next break.Rather quickly, everyone was put into what was
basically a mosh pit.The leader gave no instructions except to say
�Take responsibility for your money.�Loud music was then turned up and the instruction
to �pass your money� was given.
was changing hands rapidly all around me and the social
pressure to �pass� was pretty intense.When a large wad of cash came my way, it was fairly
easy to �pass� my lesser amount of money for that.
a weird thing happened.Amid widening calls from the crowd to �Pass!
Pass!,� money kept changing hands and someone snatched
the wad from my hand without passing anything back.My great trade had gone terribly bad in an instant.
now enlightened to the rules (or lack thereof) of the game
� this was basically a free-for-all.
boring you with details, over the next minute or two, I
was able to pull out a single dollar and make a
�legitimate pass� (at least in my mind) for a much
then I made no more passes. I
later had time to reflect some lessons for traders and
Lessons from Anarchy
won�t spoil the rest of the game and the debrief that
followed in case anyone else gets to play a similar game
in the future, but I will share some of the lessons as
they relate to trading.
and foremost: If you don�t understand the game �
don�t put your money at risk.This one is sort of obvious, but sometimes it
sneaks up on us in subtle ways.Many folks jump into trading with minimal knowledge
of how the game is really played.And even experienced investors can be tempted to
try a new game (options, forex, spreads, etc.) without
getting a working knowledge of the game.Worse yet, many have invested in businesses and
other �opportunities� without really knowing the
�ins and outs� of the game.
game I played at the conference was designed to make
people act without thinking.Loud music, peer pressure and time pressure were
can happen to traders in other ways.An unexpected news announcement comes out and you
try to play the market response, even though it�s not
part of your plan.Or
someone presents a great investment opportunity, and
you�re tempted to jump in so you don�t "miss the
have a plan, and especially an exit strategy before
jumping into any thing new.
wary of blindly following the crowd.Peer pressure, both direct (following your friends
and colleagues) and indirect (following the crowd) is a
jumping on the bandwagon can occasionally pay off in the
a pretty weak plan for the long run.The greater the fervor and excitement around an
idea, the higher the probability that the hype is nearing
the end of its run.The
�magazine cover indicator� is research-proven evidence
jump onto a trend just because everyone else is doing it.Do your research to see if the trend is
if it is, look for prudent places to enter (short-term
and investing lessons surround us.And many point back to time-tested principals �
have a plan, know your exit before you enter and make sure
you know the game you�re playing.
D.R. Barton: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.
He is a regularly featured guest
on both Report on Business TV,and WTOP News Radio in Washington, D.C., and has been a guest
Bloomberg Radio.His articles have appeared on SmartMoney.com and Financial Advisor magazine.
You may contact D.R. at �drbarton� at �iitm.com�.
As I lay in the backyard yesterday, enjoying the sun, I heard the ice cream truck (known as Mr. Whippy in Australia) traveling along our street playing a familiar tune to attract the local children: �Those were the days my friend. We thought they�d never end, we�d sing and dance forever and a day. We'd live the life we'd choose. We'd fight and never lose. Those were the days. Oh yes, those were the days.� La la la la la la, etc�
Do you know the
song. Did it get you singing?
It, of course, got me singing along, although I must admit that I only know the chorus, and it also got me thinking about those very lyrics. What days?
And were they really THE days?
So I started to look back at my life. I only have four decades of living to reminisce about at this particular juncture, but they have been very active, fulfilling and busy years. I look back on most of them fondly, even though I know that it wasn�t and hasn�t been a smooth ride.
I thought of my childhood, my teens, my twenties and my thirties and the incredible ups and downs during each of those decades. And which particular times would I say �Those were the
days.�? I guess that the answer would be all of them, for one reason or another.
It also reminded me that every day we are making �those days� right now, every minute. We will look back at these very times in years to come and declare �those were the days.� This will be especially true if we fill our moments with singing, dancing, living the life we choose and pursuing our passions and dreams.
There is no rule that the ride is going to be easy or smooth; in fact, sometimes
the times that we perceive as rough and more difficult are
the ones that we look back on and treasure the most because of the awakenings and knowledge that we gained during those times.
So when I hear folks say things such as �It wasn�t like that when I was young,� I take it with a grain of salt. Of course times have changed, just as they will continue to change for generations to come. We can pick good and bad moments in history going back for centuries. It is really just a figure of speech, and it will continue to be repeated by generations of families as they continue to echo the sentiments of their parents and grandparents.
And in the same vein, everyone will have their own version of �those were the days.�
So I�ll leave you with a reminder that I read every morning in my mother�s guest bathroom:
�Do not look back and grieve over the past, for it is gone. And do not be troubled about the future, for it is to come. But live each day and make it so beautiful that it is worth remembering forever. �
Because THESE are the days my friend�
Melita Hunt is
the CEO of the Van Tharp Institute. If you would like to
keep up with Melita�s progress regarding her recently
diagnosed lung cancer (she is a never-smoker). Please feel free to read her blog