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Feature
 Market Update for the
Period Ending December 31st, 2009
Market Condition: Bull
by
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.
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Weekly
Changes for the Three Major Stock Indices
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|
|
Dow
30
|
S&P
500
|
NASDAQ
100
|
|
Date
|
Close
|
%
Change
|
Close
|
%Change
|
Close
|
%
Change
|
|
Close
04
|
10,783.01
|
|
1,211.12
|
|
1,621.12
|
|
|
Close
05
|
10,717.50
|
-0.60%
|
1,248.29
|
3.07%
|
1,645.20
|
1.50%
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Close
06
|
12,463.15
|
16.29%
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1,418.30
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13.62%
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1,756.90
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6.79%
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Close
07
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13,264.82
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6.43%
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1,468.36
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3.53%
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2,084.93
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18.67%
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Close
08
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8776.39
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-33.84%
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903.25
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-38.49%
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1211.65
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-41.89%
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01-Dec-09
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10,471.58
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19.32%
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1,108.86
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22.76%
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1,787.71
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47.54%
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08-Dec-09
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10,285.97
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-1.77%
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1,091.94
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-1.53%
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1,772.73
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-0.84%
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15-Dec-09
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10,452.00
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1.61%
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1,107.93
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1.46%
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1,798.21
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1.44%
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22-Dec-09
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10,464.93
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0.12%
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1,118.02
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0.91%
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1,839.51
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2.30%
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31-Dec-09
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10,428.05
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-0.35%
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1,115.10
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-0.26%
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1,860.31
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1.13%
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Year
to Date
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10,428.05
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18.82%
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1,115.10
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23.45%
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1,860.31
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3.54%
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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
by
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".
Disclaimer
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