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Tharp's Thoughts Weekly Newsletter (View On-Line)

January 06, 2010 - Issue #456



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Market Update: Bull Van K. Tharp, Ph.D.

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2009 – The Year in Review by D.R. Barton Jr.


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Market Update for the 
Ending December 31st, 2009
Market Condition:


Van K. Tharp, Ph.D.

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.

However, if your beliefs are not similar to mine, then this information may not be useful to you. Thus, if you are inclined to do 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. Just 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. 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), 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, 4) tracking the dollar, and 5) the five strongest and weakest areas of the overall market.

 Part I:  Van’s Commentary—The Big Picture

2009 was a good year for the market, and the rally since March 2009 has been of historical precedence.  Rallies out of bear markets usually come on large increases in volume—but this is not so for the rally of 2009.  For example, the rallies from significant bear market bottoms, such as those of 1974 and 1982 were accompanied by volume increases of around 50%.  But in this secular bear market, the rallies of 2003 and 2009 were accompanied by decreases in volume.  This year’s huge rally occurred with about a 30% decrease in stock volume.  Does that make you a little suspicious?  As 86 year old market guru Richard Russell has said, “Volume should always be studied as a trend relative to what has preceded it.” 

Furthermore, as I mentioned in a previous article, the U.S. Government needs to find $3.5 trillion in the next year for its borrowing.  That’s about 30% of the GDP.  And the Bond King, Bill Gross at PIMCO, wonders just where all that money will come from.

Part II: The Current Stock Market Type Is Now Bull Quiet 

The SQNTM for 100 days has moved back from a strong bull market to just bullish.  And the ATR as a percentage of close is now in the quiet range.  We haven’t seen that for a while.

Using SQN to define the market type is a much better method than I would have ever dreamed when I first started working on it.  For example, it signaled a bear market in January 2008, which would have been a good date to go short.  And it signaled a bull market in August 2009, which was a great time to go long.

Let’s look at what’s happening in the three major US indices now.  The next table shows the Dow, the S&P 500, and the NASDAQ over the past five weeks and over the last year.  You’ll notice that the Dow is up 18.82% after being down 33% in 2008.  The S&P 500 is up 23.45% after being down 38.49% in 2008.  And the NASDAQ is up 53.54% after being down 41.89% in 2008.  And this is after huge declines in early 2009.

Weekly Changes for the Three Major Stock Indices


Dow 30

S&P 500




% Change




% Change

Close 04







Close 05







Close 06







Close 07







Close 08










































Year to Date







Bear market rallies can be substantial and 2009 was kind to the markets.  Watch our market type closely because I doubt if much of 2010 will be bullish.

Part III:  The Strongest and Weakest Market Components

Regular readers understand how we use various ETFs to track the relative strength of regional and national economies of the entire world, important currencies, and industrial sectors.  I publish this model once a month in this newsletter.  Ken Long developed the algorithm we use and publishes his more detailed report every weekend at www.TortoiseCapital.com. If you’d like to understand how to use this information to trade better, then I’d suggest you attend one of Ken’s workshops, which are held several times each year. Ken will teach the next one in New Zealand in February (details about those workshops are available on our website).  Ken explains how this method helps him understand where the big money is moving, and he teaches numerous systems based on his methodology that have System Quality Numbers™ above 5.  And by the way, the Australia and New Zealand dollars are both still up against the U.S. dollar, so now is probably the time to get the best deal on those workshops if you plan to attend.

The Dec 31st global market relative strength data are given below.

The areas in green are strongest (the total rating is at least one standard deviation above the mean); those in yellow are the next strongest (above the mean).  Those below the mean are in brown, and those more than one standard deviation below the mean are in red.  I’ve taken out all the double leveraged funds from my database, so those funds don’t completely dominate the top and bottom groups.  

The overall market components are not nearly as strong (relatively speaking) as they were this time last month.  The strongest countries are Taiwan (52), Russia (60) and Emerging Europe (60), with South Korea (56), Chile (54), Brazil (53) and Australia (53) rounding out the top countries.  Other strong areas include metals and mining (67), semiconductors (64), oil and gas exploration (60), and the strongest companies (55).

Many of the strong areas from last month, such as the Japanese Yen (then 64 and now 18) have disappeared.  During strong bull markets, strong areas stay strong for months, not weeks. 

The next chart shows the futures, real estate, bonds, and the strongest and weakest ETFs.

Here, b2b Internet (85), coal (73), steel (68), metals (67), semiconductors (64) and natural gas (63) stand out.  Again, the changes from month to month stand out because b2b internet was the weakest area last month at 17.  This month, the weakest areas are all shorts of the strong areas, or in the Yen, or various interest rate instruments.  

Part IV: Our Four Star Inflation-Deflation Model

Once again, we are in credit contraction mode, so this is not the inflationary bear market I once thought we were going to get six or seven years ago.

Date  CRB/CCI XLB  Gold  XLF 
Dec-05 347.89 30.28 513 31.67
Dec-06 394.89 34.84 635.5 36.74
Dec-07 476.08 41.7 833.3 28.9
Dec-08 352.06 22.74 865 12.52
Jan-09 364.5 21.06 919.5 9.24
Feb-09 352.45 19.22 952 7.56
Mar-09 368.83 22.21 916.5 8.81
Apr-09 371.55 25.67 883.25 10.73
May-09 417.04 27.17 975.5 12.23
Jun-09 398.76 27.25 934.5 11.95
Jul-09 413.41 29.61 939 12.95
Aug-09 415.49 29.81 955.5 14.7
Sep-09 430.67 30.94 995.75 14.94
Sep-09 452.69 29.34 1040.5 14.05
Nov-09 492.22 32.5 1175.8 14.66
Dec-09 484.42 32.99 1104 14.4

We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.  The CRB is at its highest level on the table and so is gold. 

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
  Higher Higher   Higher  Higher Higher Higher  Lower Higher  
DEC    +1    +1    +1    -1/2 2.5

 The picture here signals clear inflation, plus danger for the U.S. dollar.

Part V: Tracking the Dollar

Month   Dollar Index  
Dec-00 104.65
Dec-01 109.51
Dec-02 101.48
Dec-03 86.21
Dec-04 80.1
Dec-05 85.65
Dec-06 80.89
Dec-07 73.69
Dec-08 80.69
Jan-09 81.01
Feb-09 83.11
Mar-09 83.84
Apr-09 82.43
May-09 78.89
Jun-09 77.02
Jul-09 76.73
Aug-09 75.19
Sep-09 74.63
Sep-09 73.56
Nov-09 73.15
Dec-09 73.82

The dollar is starting to show a little bottoming but part of that is because of the seasonal weakness in the Euro.  The Euro typically starts going down in December and that can last into the spring.  And Europe has been hit by much worse conditions than the United States. In fact, Steve Sjuggerud, Chris Weber, and Jeff Clark have all pointed out the weakness of the Euro.

General Comments

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 2009.  Did you make money?  If not, then why not?  It’s probably because good trading skills don’t happen just by opening an account and adding money.  You probably spent years learning how to perform your current role at a high skill level.  Pulling large profits from the markets requires a similar amount of preparation.   Unlike other professions, however, trading also requires massive self-work to produce consistent, large profits under multiple market conditions.  The Van Tharp Institute has a number of great ways to help you develop your trading skills over time so you can earn consistent trading profits.

Next week, Florian Grummes will update us on the gold situation.  Until the next monthly update in early February, this is Van Tharp.

About Van Tharp: 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 www.iitm.com. 

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Trading Tip

2009 – The Year in Review


D.R. Barton, Jr.

“The law of unintended consequences pushes us ceaselessly through the years, permitting no pause for perspective.” —Richard Schickel, author and journalist

What a year 2009 was! We went from “The world is going to end!” at the beginning of March to many believing that the problems were all behind us by the end of the year.

So here’s an insightful (I hope) and possibly cynical review of the past year…

The single biggest issue driving the markets in 2009:  Central Bank liquidity creation. There’s not even a close second.  While this cash dump started in 2008, it really didn’t hit its stride until this past year.  I’ve referred to this numerous times as a  “sugar high”; the market has been given the equivalent of calories with no nutritional value.  Every time this has happened in the past the corrections have been ugly.  In just the last decade, money was flooded into the market to avert Y2K, to bolster the economy after 9/11, and, perhaps most inexplicably, to keep the real estate bubble afloat in 2007.

As in our dietary analogy, after the spurt of energy gained from eating too much sugar, both the body and the markets tend to crash after the stimulant is digested.

With the markets, it’s near impossible to tell how long it will take to digest the liquidity.  An unprecedented amount of money was created by central banks all over the world.  With a unique environmental influence like that hitting the markets, many analytical tools become less useful.  When we move out to the far edge of the “bell curve of experience,” normal patterns of action and reaction don’t apply.  In science and engineering we call these edge effects—operating in areas that are not well-defined by the normal models.  And whether looking at pipe flow or ecological boundaries, standard models break down at the edges.

So what?  Now more than at any time since the 1930s, we need to dig many layers below the pabulum that passes for financial and economic news.  It’s not enough to know that the stock market has been going up.  Key macroeconomic measures like unemployment rates are still not in sync with the cries of “Recovery!”. 

But, only rash or imprudent people step in front of freight trains!  Heading into 2010, the market momentum carries on.  Regardless of what caused it, we can’t ignore the market realities.  This market move has many of the earmarks of a brand new liquidity bubble.  As such, it could go on for some time and may have massive and abrupt upward excursions before it ends (the first trading day of the year was a micro version).  Take advantage of the trend momentum, but please protect your accounts!  Everyone must have a workable exit strategy.  This is no time to think that “buy and hold” has all of a sudden started working again!

For our friends in Europe, Mexico and elsewhere, Happy Kings Day!  We hope your gift giving and receiving is a joyous occasion.  The Bartons will be enjoying a modest Epiphany celebration in Delaware right along with you!

I’d like to thank everyone that wrote in kind words about my reflective article, “A Great Way to Approach Markets.”  Your support is much appreciated!  Next week we’ll take a look at the single most important trading and investing effect caused by the massive influx of liquidity.  Until then…

Great Trading,

D. R.

About D.R. Barton, Jr.:  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 on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  "drbarton" at "iitm.com".



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