Tharp's Thoughts Weekly Newsletter

• Article: January 2016 Market Update: Sideways/Bear Volatile Market Type, by Van K. Tharp
• Workshops: Forex Early Discount Ends Next Week!
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• Tip: January 2016 SQN^® Report, by Van K. Tharp
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Feature Article

January 2016 Market Update:
Sideways/Bear Volatile Market Type

by Van K. Tharp, Ph.D.

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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, and 4) tracking the dollar. 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.

Part I: The Big Picture

So what’s going on in the world?

First, we have had shale oil “fracking” revolution in the US which allowed us to unlock great quantities of domestic oil and become the world’s largest oil producing nation. Saudi Arabia then entered into a production war with the US (against shale oil) to keep production quantity high. This has driven the price of oil down to a level that will drive most of the “fracking” companies out of business. Many simply cannot produce oil profitably at $20 a barrel and about 30% of all American oil exploration and production companies will need to file for bankruptcy. This will cause the high yield bonds from these companies (and junk bonds as a whole) to collapse. This could be deadly for the entire bond market and could actually spill over to the stock market.

There is some long term risk to the strong US Dollar at this point because the Chinese currency will be part of the world’s reserve currency this year and then Saudi Arabia might only accept payments in that currency instead of the dollar. This would remove one of the major props to the US dollar.

China has finally seen a major slowdown. There is no longer a large demand in oil nor a big demand in commodities from China. As a result, the world is in a commodities bear market. Most emerging markets are crashing and they are all doing their best do devalue their currencies (especially with respect to the US Dollar). As a result, US products will become much more expensive to overseas buyers and this will probably impact S&P 500 earnings.

What are the markets telling us now? Over the last 100 days, the S&P 500 went up 0.99% so we are now in a sideways market type. We are sideways, however, only because the S&P 500 went up 2% on the last day of January. The month of January had four days where the market measured sideways (including the last days) and 15 days where it measured bear. Throughout December, there were 4 days that the market type was neutral (sideways) and the rest of the days were all bear. The market is volatile now so that is another sign of bearishness. The Market SQN score for 200 days has also become Bear Volatile.

The Market SQN scores for 25 days and 50 days are both Bear Volatile but they were Strong Bear Volatile before the 2% up move on the last day of the month. Thus in my opinion, we are now in a bear market even though this is still not an “official” bear market (down 20% or more).

Debt Clock

The usdebtclock.org website says our official debt in January went from $18.51 trillion to $18.96 trillion or up by $450 billion. Since December 31, 2014, our official debt went up $920 billion but almost half of that amount was just in the last month. Furthermore, the tendency for the government to manipulate our unfunded debt amount seems to have tapered off as it’s now the highest it’s been since November 2014 and has gone over $100 trillion again.

Incidentally, the website says there are 119.6 million taxpayers. It also says there are 161.0 million people receiving government support, however, I’m not sure how they determine that figure as some of the categories certainly seem duplicated. My figure for people receiving government support comes by adding US Retirees (49.3 million), food stamp recipients (45.1 million), and disabled people drawing social security (10.8 million). I don’t think there is any overlap with these groups — which total 105.2 million. This makes a group which constitutes 88.0% of the number of taxpayers. I could also include all government employees (23.9 million) as among those supported by taxpayers — but they do pay taxes. Remember that about 10% of the taxpayers (12.0 million) pay most of the tax revenue in the country.

Part II: The Current Stock Market Type Is Sideways Volatile / Bear Volatile

My market type classification is not predictive but rather descriptive. Rather than telling us what’s going to happen, it simply tells us what’s going on now — which is very much like looking at a trend on a chart. You can say, well, it’s going down, however, in a few days the trend might change.

In this case, my market type looks back 100 days which puts us at September 8th — close to the last lows. The market went up quite a bit over the next 30 days into October 2015. Without a strong move up now, I suspect we could be in strong bear volatile market type by next month.

The graphs below include a chart of weekly bars for the S&P 500 over the last year, the Market SQN® score for 100 days, and the ATR percent volatility.

The chart below shows that during the four months the market has been in bear territory and that it spent most of 2015 in either neutral or bear territory. But most of January was in bear territory.

The third chart shows that this market is starting to look quite ominous with a strong trend toward more volatility which is a sign of the bear.

Below is a chart of the recent weekly changes in the three major US Indices. Despite a strong close to the month of January, the DOW is down 6.4%, the S&P500 is down 6%, and NASDAQ 100 is down over 10% for the new year.

Part III: Our Four Star Inflation-Deflation Model

In the simplest terms, inflation means that stuff gets more expensive, and deflation means that stuff gets cheaper. There’s a correlation between the inflation rate and market levels, so understanding inflation and deflation can help traders understand some important big-picture processes.

See the tracking table below.

Here are the model components and how the prices looked at the end of September compared with two months back and six months back.

Every month during 2015 was deflationary according to our model except for May. Yet despite that, the Federal Reserve started raising interest rates in December. That suggests down markets for 2016 and more deflation, however, the first month of 2016 was neutral.

Banks are still not lending money — which is a deflationary sign. This chart from the St. Louis Fed’s website shows the M-1 money multiplier is about 0.75 which means banks are lending about 75% of the money supplied by the Fed. The money multiplier figure used to be more than twice that amount in the years before the global financial crisis. It needs to be much higher (two to three times higher) than that to really stimulate the economy (and bring back inflation).

Part IV: Tracking the Dollar

The US Dollar Index has gone down about 2 points since its highs last month. But it is still in a general uptrend and I’d expect that to continue if the Fed continues to raise interest rates.

Conclusion

The market spent almost all of 2015 in a neutral to slightly down direction. That is, the market was sideways with relatively quiet volatility. Those are about the hardest market climates in which to make money. The Chinese economy is not doing well, with their stock market hitting a 13-month low. The US dollar (because we’ve raised interest rates) is the strongest currency despite our official debt reaching nearly $19 trillion. And although our debt continues to grow at unsustainable rates, we have a deflationary climate in which the dollar seems to purchase more (meaning that the impact of the debt is growing). Europe is not in good shape. Energy is in a major decline and we have a major bear market in commodities.

While we do not use market type to predict, just to tell us what is happening right now, the fundamentals would suggest that we are due for a significant bear market in 2016. Watch volatility. If it continues to climb, then we will finally have an easy climate in which to make a lot of money in the market.

As I say every month, notice what the market is doing. Right now the market is Sideways Volatile to Bear Volatile. Can you make money in this climate? If yes, then do what you do. If no, then your best bet is probably the US dollar — especially in a deflationary environment with a strong US dollar.

Until next month’s update, this is Van Tharp.

About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and 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.vantharp.com. His new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.