Workshops

Berlin, Germany
August 2009

This Is Dr. Tharp's Only Trip to Europe This Year

The Euro is a great value compared to the dollar, so now is the perfect time to register for these workshops.

 Dr. Tharp is bringing two of his workshops that will improve your trading overnight!

Feature

Tharp’s Thoughts
Market Update for the Week ending May 30, 2009
Market Condition: Volatile Bull

by

Van K. Tharp

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, then you may not find them useful. I find the market update information useful for my trading, so I do the work each month and I'm 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 U.S. 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: Market Commentary

The old saying goes, “As General Motors goes, so does the economy.” And I think I’ve even heard, “As General Motors goes, so does America.” Let’s see, a professor wrote a paper published by the St. Louis Federal Reserve that said the U.S. is bankrupt. GM is now bankrupt. The U.S. taxpayer is financing GM to the tune of $50 billion ($20 billion already evaporated) and will be a major shareholder. Does this mean we get a big discount on all new cars? Oh, I almost forgot that both GM and Citigroup were dropped from the DOW JONES INDUSTRIALS. 

We’re in a secular bear market, which I expect to last at least until 2015-2020. Who knows what’s next short term? In the meantime, the market has given us some opportunity lately. 

I have some properties in Memphis. It’s been a disaster as Memphis, as is frequently pointed out in documentaries on the economy, is the bankruptcy capital of the US. However, I am finally about to sell these things, albeit at substantial losses. I’m able to do so because the Obama administration is allowing people to buy these houses at 3.5% down. Wow, we are starting the subprime mess again! It’s good for me, but these houses are still dropping in value and people are buying them at 3.5% down?

Part II: The Current Stock Market Type Is Volatile Bull

We have had some nice up movement in the market and the S&P 500 is now a little higher than it was at the close of the year. Since this recovery has been rapid, it’s turning into a nice bull correction. Both market types that I explained in last month’s update are now Volatile Bull, although volatility has calmed down considerably. 

I calculated the chart after the close on Tuesday, so it’s not showing the normal Friday closes, but the market type is still Volatile Bull.

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

Only the DOW is down on the year, but the DOW contains GM (at least until recently).

Part III:  The Strongest and Weakest Market Components

I have a new model in which we track the relative strength of the various ETFs representing the economy of the entire world.  I will be publishing this once a month.  Ken Long, who developed the algorithm we use, publishes a similar report every weekend at www.TortoiseCapital.com. If you’d like more information, then I’d suggest you attend our ETF workshop, which is held several times each year. The next one will be held for the first time ever outside of the US in Berlin, Germany.  Ken explains how these numbers are derived in this workshop.  You can sign up for it here.

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 also taken all of the double leveraged funds out of my database, which means that the top and bottom funds are not devoted entirely to those groups.

Since most areas are generally weak and our relative strength is influenced most by recent activity, I’d suggest that you not rely on this information to determine what sectors of the world to invest in.  This could support your ideas, but it should not be the only basis.

Notice that the strongest sectors are India (83), China India (56), Emerging Europe (56), China (54), and Singapore (53). China is starting to look good again, with US ADRs in stocks like KONG up over 100%.  The really weak areas are Regional Banks (15), the US Dollar (21), the Homebuilders (25), Biotech and Genome (25), and the Mexican Peso (28).  Most of those areas were very weak last month as well (although not the dollar).

View Larger Image

The next part of the chart shows commodities, real estate, and interest rate products, along with the top and bottom 15 ETFs. As I said, I’ve taken out the double leveraged funds so that we have a better example of the overall world picture.

Notice that suddenly we have even more strong and weak areas. So let’s add Russia, Coal, Gold stocks, and Steel to our list. The Templeton Russia fund is selling at a huge premium, again. The weakest areas include regional banking and the funds that short the strongest areas.

Part IV: Our Four Star Inflation-Deflation Model

Once again, we are in credit contraction mode, so it is not the inflationary bear market I once thought we were going to get six or seven years ago.  But I suspect that we’ll be in one by the end of 2009.  Gold is certainly suggesting that.

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 finally bottoming.

Wow, look at the one month change in the CRB/CCI.  It was huge, almost taking the index to the June 2008 highs.  Now our reading is now showing that inflation is coming back, probably with a vengeance.  And we all know that the U.S government is printing money at a record pace.

Part V: Tracking the Dollar

The dollar is continuing its uptrend because of deleveraging.

Undoubtedly, the dollar, which showed up very weak in our world model, is turning down now.  It’s now at the lowest it has been since September 08.  Hmm, and I’m going to Germany.  I think Tharp’s law will be in effect again: Van travels and the dollar goes down.  

General Comments

Crisis always implies opportunity.  However, this is now a market in which everyone can make money.  It could end any time, but clearly we are in a major bull move. And now volatility is only on the very edges of what makes this a volatile market, so that’s also a good sign for the bulls.

Until the next update, 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

Is the U.S. Dollar Getting What it Deserves or Is This Just a Cyclical Move?

by
D.R. Barton, Jr.

I just spent five days in lovely Vancouver, British Columbia. I was there with my best pal and business partner Christopher Castroviejo lecturing at an investment conference.

As with every trip north of the border, I find the Canadians to be an extremely warm and friendly group of people. And Vancouver is an especially cosmopolitan city, with a broad and deep diversity of inhabitants from various ethnic and national backgrounds. I had world class French, Italian and Japanese meals all within walking distance of the hotel.

Those friendly Canadians also have a strong sense of national pride (as well they should). The most frequently asked question at the conference was whether we thought the Canadian dollar would not only get back to parity with its U.S. counterpart, but whether it would eventually grow to 1.50 or 2.00 Loonies per American Greenback. 

The world of currency exchange is fascinating and the possibilities are almost endless; however, I don’t see any way the Looney/Greenback relationship will get that far out of kilter.

Sure, the U.S. central bankers have been promising, printing and spending dollars like a bunch of drunken sailors on shore leave. But practically all of the other central banks have been doing the same to some degree. The real issue that will moderate the Canadian/U.S. exchange rates is the amount of trade done between the two countries. A whopping 85+% of Canadian exports go to the U.S. It is hard to imagine a currency swing to 1.50 Loonies per Greenback; the Canadian dependence on the U.S. as a trading partner just won’t allow it.

That being said, some interesting things are happening in the world of currencies. The persistent strength of a broad spectrum of currencies against the U.S. dollar has put the Euro currency and others in an overbought position that is likely to be relieved, at least in the short to intermediate term. In the last year, the Euro has only been “classically overbought” versus the dollar a couple of times, as seen below.

Within days of becoming overbought, the Euro retreated significantly in both December and March. This trek into overbought most likely will yield another pullback. One other thing is clear: when the stock market is hitting periods of fear, the world flocks to the safety of the U.S. dollar. In the chart below, we see that when the stock market has hit its low points (in November of ‘08 and March of ‘09), the Euro approaches it lows as cash retreats to the dollar.

If the stock market remains strong for a few days (or weeks) longer, then count on the Euro remaining strong as well. But when the market retreats, look for the Euro to give back some of these gains; this correlations will stay in effect until the cycle is broken by some macro event.

And while we’re on the topic of currencies, here’s an interesting comparison of the percentage moves of the some major currencies to the S&P 500 since the market top in October 2007.

As you can see, the Yen has been the strongest currency by far, with the British Pound lagging. The Yen is clearly the least correlated of the four currencies in the chart, showing that its relationship to the dollar is unique in the current climate.

What conclusions can we draw from these studies? First, there is not yet a real mandate (in terms of price action) indicating that the profligate spending of the U.S. will push the dollar’s value down from now on. The more likely scenario is that the dollar will gain strength whenever fear comes back into the market. In the much longer term, the unprecedented printing of capital will certainly erode the value of the dollar; but for the short to intermediate term, other market and psychological factors continue to play a strong role.

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".  

Q&A

Extreme Volatility

Q: I found the comments about extreme volatility in your latest newsletter very interesting. I knew about the high volatility link to bear markets from reading (although I don't recall exactly where) and that is why I asked a question on your forum some years back about what kind of trading system works in bear markets. It was highly discussed, but as I recall no one challenged or answered my comments that trend following systems fail in bear markets.

Anyways, I was particularly interested in your comments about the best strategies to trade under those conditions. Do you have any more information on where you learned that information so I can do some further research on the topic? -- Richard

A: The systems that work best in high volatility environments are day trading systems that capitalize on volatility and option methods that capture volatility.

Long term trend following (shorting) generally doesn't work unless you are willing to tolerate huge drawdowns. -- Van

If you missed Van's article last week, be sure to read it. It was very informative and we received a lot of thanks and comments and questions on the subject of volatility. http://www.iitm.com/weekly_update_backissues.htm

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