Van Tharp Newsletter

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

  • Workshops Blueprint for Trading Success and Peak Performance 101
  • Article Market Update, Market Condition: Bull Quiet by Van K. Tharp
  • Trading Education Peak Performance For Traders, New Students, Start Here
  • Trading Tip Don’t Ignore the Reaction to News: More Greek Debt Problems by D.R. Barton, Jr.
  • Mail Bag LUCK, (Labor Under Constant Knowledge)


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Feature ArticleVan Tharp

Market Update for the Period ending April 2, 2010
Market Condition: Bull Quiet

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 and are useful to my own trading.  I do the work each month and am happy to share this information with my readers.

If your beliefs about the macroeconomic environment and markets are different from 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. Simply know that I admit that these are my beliefs and that your beliefs might be different.

I write these updates each month for the first issue of Tharp's Thoughts, which allows me to use the previous month's data. This update covers the most important areas that help me understand what is going on in the market: 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) my four star inflation-deflation model plus John Williams' statistics, 4) the dollar’s relative value, and 5) the five strongest and weakest areas of the overall market.

Part I: Van's Commentary—The Big Picture

Since last month’s update, it almost looks like the economy has returned to normal with a quietly rising stock market.  Unofficially, though, nothing has changed.  In fact, the fundamentals are worse.  Obama managed to get his health bill passed, which should soon cost the U.S. government (U.S. taxpayers) another trillion dollars… and that’s probably just the beginning.  It is the start of socialized medicine in the U.S., in my opinion, and every country with socialized medicine pays for it with a value-added tax (VAT).  When will the U.S. add the burden of a national sales tax to U.S. taxpayers?

In 2006, U.S. men at age 55 had an average of about $25,000 in savings.  After the 2008-9 crash, it is probably a lot less.  Thus, there is nothing to support the average American going into retirement except social security.  The Social Security Administration  publicly announced in late March that it will spend more than it takes in this year—many years earlier than it expected to run a deficit.  At some point, the government will have no choice but to default on its contractual obligations such as social security.

One more interesting piece of news: Senator Charles Schumer (D-NY) recently introduced the “Currency Exchange Rate Oversight Reform Act of 2010."  This bill will require the Treasury department to identify “misaligned currencies” and put strong trade sanctions against any country labeled a “currency manipulator.”  Geithner has railed against China’s currency policies in the past and promised to identify China as a currency manipulator this month.  If that happens, then Schumer’s bill will probably pass in May. 

The effects of Schumer’s bill would closely resemble the trade restrictions of the Smoot Hawley Tariff Act of 1930.   Many believe that legislation worsened the severity of the Great Depression as other countries retaliated by placing large tariffs on imported goods from the U.S.  Cumulatively, Smoot-Hawley and the resulting retaliatory tariffs cut imports to and exports from the US by more than 60% while the national GDP fell 50%. 

Part II: The Current Stock Market Type Is Now Bull Quiet (which is usually an excellent market for profits) 

How much difference a month can make!  Both the 50- and 100-day SQN™ scores are in bull mode and the 20-day ATR%  moved to quiet.  Bull Quiet is usually an excellent market for investors.  But once again, anything could happen in the near future.

Let's look at what's happening in the three major US indices. The next table shows the Dow, the S&P 500, and the NASDAQ over the past five weeks and over the last few years.

weekly change
The market is basically breakeven on the year with the DOW and NASDAQ 100 up slightly while the S&P 500 is down slightly.  Again, I doubt if much of the rest of 2010 will be bullish, but for the moment, we are in quiet bull mode.  Notice that the S&P 500, the U.S. benchmark index, is still lower than it was in 2004.

Part III: The Strongest and Weakest Market Components

By this time, most of you understand how we track the relative strength of the components of the world economy using various ETFs. I publish this model once a month. Ken Long, who developed the algorithm we use, publishes a more detailed version of the report every weekend at  Ken uses his data as a framework to guide his trading.  In June, Ken will teach how he uses this model along with his numerous high SQN trading systems. (Learn about Ken's June Workshops.)

The numbers in green are the strongest areas (they are more than one standard deviation above the mean); those in yellow are the next strongest (above the mean up to 1 standard deviation). 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, which means that the top and bottom funds are not devoted entirely to those groups.

The April 2nd 2010 data are given below.

A number of countries are now green: Thailand, which I’ve just added (77), Russia (71), Emerging Europe (68), South Korea (66), and South Africa (66)—none of these countries are usually particular strong.  Weak countries include Chile (40), and Spain (43).  Weak currencies include the Japanese Yen (27-29), the Euro (37), the Yuan (38), and the Swedish Krona (39). 

From a sector standpoint, metals and mining (66), retail (63), Building Material in Europe (61); and Insurance (61) and gaming (60) are strong.  Weak areas include Utilities (43), Health Care, no help from ObamaCare (45); Broker dealers (44), Networking (45), and Software (45).

The next chart shows performance for commodities, real estate, bonds, and the strongest and weakest of all non-leveraged ETFs.


Here is what I said last month:  There's an interesting mix on this table with nickel and biotech on top with oil, coal, steel, and real estate also being areas of relative strength. Some of those areas have actually persisted for a month, although we’re still not seeing prolonged trends.  This month Nickel (98) is still on top, with steel (78), Thailand (77), Russia (71), Biotech (68) and insurance (68) being up there. 

The weakest areas are natural gas (7 or 8), Emerging Markets (16), Grain (34), and Agriculture (26).  In addition, most of the interest rate products are looking very weak…also a function of the impact of ObamaCare on top of the already massive government borrowing.

Part IV: Our Four Star Inflation-Deflation Model

The US economy (and much of the world economy) is in a credit contraction mode. While the quantity of money in the economic system may be higher as a result of massive government infusions, its movement around the economy—the velocity of money—has slowed significantly in the last year. See the figures for M3 below.  What's causing this? The personal savings rate is way up, people and companies are trying to pay down debt, and overall bank lending is in steep decline. Six or seven years back I thought we were in for an inflationary bear market, but the slowing velocity of money makes that scenario less likely for now.  I now believe we could see either inflation or deflation… and deflation would be terrible for the U.S., which is now the largest debtor country in history.

As you can see from the long term table below, gold is way up from a few years back, but there's no strong multi-year trend visible in the CRB/CCI or the materials ETF (XLB). Conversely, financials (XLF) are half of what they were just four years ago.






Dec 05





Dec 06





Dec 07





Dec 08





Dec 09





Aug 09





Sep 09





Oct 09





Nov 09





Dec 09





Jan 10





Feb 10





Mar 10





Now let’s see what the readings have been on the two-month and six-month changes.

We now seem to be moving back into inflationary mode in the short term.  When the Obama Health Care Bill passed, treasury rates jumped to the highest level since 2008 when the Lehman crisis occurred.  The market recognizes that the legislation simply means the government is going to spend more and more.

I did look at for the real statistics that the government now alters or ignores as their way of saying, “Everything isn’t so bad!”  M3, which the government no longer publishes, went from 18% growth at the beginning of 2008 to -5% at the latest reading.  Despite “printing” massive amounts of new money, the government is not getting it into the broader economy and banks are not lending.  As it was originally calculated, the “old” CPI now shows 10% inflation—but that, at least, is down from where it was.  Real unemployment is now at 22% (close to the Great Depression levels of 25%).  The GDP is currently shrinking by 5%, and the real inflation adjusted GDP data still show that we’ve been in a recession since 2000—except for one quarter in 2003.  These are not pretty fundamentals.

Part V: Tracking the Dollar

When I went to get this month’s data, I discovered that the government had totally revised the figures for the last few months.  We published February’s index number as being over 80 but look at the table to see the new figure.  I’m not sure what’s going on as there were no notes about the revisions.  In addition, the Fed published no daily data in March as they used to.  As a result, I will not comment on the dollar until I can figure out what the Fed is doing with the figures.  (For my source, see )
Regardless of the recent calculation changes, consider the long term trend.  When I look at the figures since 1973, the dollar high was in May 1985 at 143.91.  After hitting a relative high of 111.99 in February 2002, it dropped below 100 for the last time in Jan. 2003.  Since then, it’s down 32%.

General Comments

Last month I pointed out that in 2007 the DOW passed 14,000 to hit a low of only 6747.05 last March.  We’ve now recovered more than 50% in less than a year, which is a great market recovery.  However, in my opinion, there is a lot more of the bear market to come because the fundamentals of this economy remain weak or have gotten worse.

I think our market type measurement does a fairly good job over the last four years or so, even though it doesn’t exactly identify market turning points.  The following table is a summary of the market type shifts signaled by our 100 day market type SQN™.

chart 3

Notice that the market type shifted to Bull on 10/3/06 and rose about 100 points until it shifted to Neutral on 8/13/07.  It shifted to bear on 1/15/08 when the S&P 500 had a huge drop.  And it basically shifted back to Neutral on 4/2/08 shortly after the bear market bottom and then to Bull on 6/4/09, three months after the bear market bottom.  We do have extensive periods of several months when it shifts from one mode to another and basically, as the market type says, the market isn’t doing much.  That happened last February.

In these monthly articles, I try to give you a general update about market conditions and when they might be changing. That being said, please don't rely on these updates to guide your trading. This article is no substitute for you having your own process that signals good trading opportunities. The key use of this information in my opinion is not to forecast the market but for you to know when to shift systems.  You should know how each of your trading systems perform under various market conditions.

Furthermore, you should never open a position in the first place without knowing when to get out. That's a fundamental axiom for trading and investing. If you haven't heard this before or the other ideas mentioned above, read my new book Super Trader, which covers all of this, so you can make money in any kind of market.

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 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.

Until the April update, this is Van Tharp.

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Trading Tip

Don’t Ignore the Reaction to News: More Greek Debt ProblemsBarton

The European Union’s vague plan for bailing Greece out of its debt problems was enough to calm the credit markets’ fears for most of March.

That just changed on Tuesday when the credit markets signaled they need more than happy talk about Greek bailout plans.   

When News Matters

A ten billion Euro Greek bond sale failed to attract much attention while the spot rate for Greek debt climbed back to all-time highs. It seems that the generalities and abstract language of the bailout plan are not concrete enough for real world bankers and fund managers who actually put numbers to the risk on debt from Greece.

It didn’t take long for the politicians to start the gamesmanship.  Greece wants its  bailout now and expects the agreement in principle to kick in since its borrowing rates are now uncomfortably high—almost four percentage points higher than comparable German bonds.

High rates alone, however, are insufficient to trigger assistance from reluctant neighbors like Germany who made that point quite clear this last week.  Some bankers and bond buyers are voicing opinions now that behind the facade of the current agreement to help Greece, there is no real agreement at all.

Making the situation even more difficult for Greece is that recently issued Greek bonds (since the crisis started picking up steam) are now underwater.  Can you understand why it’s getting harder for Greece to find new purchasers for their debt?

As Greek bond yields have spiked, the Euro continues to lose ground.  Meanwhile in the equities markets, we see a different dynamic playing out.

When News Is Ignored

Generally, traders would view a legitimate sovereign debt crisis as a problem for the equities markets.  But on Tuesday, the broader U.S. equities market shrugged off the bad news.  After the S&P 500 gapped down at the open, it actually ended the day a couple of points higher.

This isn’t the first time this market has behaved this way.  In the past six weeks, the market has shrugged off bad employment numbers, weak housing numbers, multiple renditions of the Greek credit problems, and other shaky economic reports, only to continue a relentless (if somewhat staid) march higher.  A market that so consistently ignores bad news gives us highly valuable feedback:  it’s not ready for a big pullback yet. 

Many of my trading and investing friends and colleagues keep looking for a place to short this overextended market…and that will come.  But for now the market is telling us the short term picture is strength upon strength.  This is the type of market where it pays to wait for confirmation of a turn before trying a counter trend trade.  Don’t try to be first— lots of pioneers get killed…

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 and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".

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LUCK, (Labor Under Constant Knowledge)

Q: I've read Trade Your Way... and am 3/4 of the way through the home study course. I've traded cotton, grains, oilseeds and foreign exchange professionally for 14 years and I trade stocks personally with mixed results (much better results since I read your book). I have a mix of fundamental and technical trading techniques but I have stopped trading over the past 2 months as I have just bought a business and there's too much external stress in my life getting this up to speed for me to trade profitably.

On reflection of the reading, study and trading experience that I've done, it seems to me that trading is a lot about luck and if you are lucky enough to have the intuition to get you set the right way in a market at the right time. I definitely agree that risk management / position sizing is key, but do I even need to worry about a set-up or entry signal, when your coin toss approach proved that with appropriate risk management skills, you can still make money with a random entry approach? I would appreciate your thoughts on this please.

A: Luck, in my opinion, stands for Labor Under Constant Knowledge.

It requires the following:

1) A purpose... why are you here and what drives you. You usually know this through what gives you bliss.

2) An understanding of how trading fits within your purpose.

3) A commitment to do whatever it takes to be successful. When you have commitment, you don't do dances with the obstacles that get in your way. Instead, you simply walk around them and move toward the goal. And when you do, there are usually a lot of Divine Interventions and miraculous things that happen. You could call those luck.

Within the topic of Labor Under Constant Knowledge, you need to eliminate your psychological issues because they will come up whether you just attempted to trade the market, or whether you are trying to develop a good system.

That being said, I think it's fairly easy to design a very good system to fit any particular market type... and almost impossible to find a system that works in all market types.

The most important aspects of the system are:

1) Freedom from psychological issues so that you can trade the system without making mistakes
2) Position sizing to meet one's objectives.
3) Selecting an appropriate market to trade (which relates to market type).
4) Understanding R-multiples and how they can help you manage risk.
5) Managing your exits.
6) And lastly, finding setups/entries that will allow you to take a 3 to 1 reward to risk ratio.

Why take a random approach to entry when you don't have to.


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April 07, 2010 - Issue #469


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