January 2019 Market Update Bear Volatile Market Type, by Van K. Tharp, PhD

van tharp bkI 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. 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. If your beliefs are not similar to mine, however, then this information may not be useful to you. Thus, if you are inclined to go through 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.

These monthly updates are in the first issue of Tharp’s Thoughts each month which allows us to get the closing data from the previous month. These updates cover 1) the market type (first mentioned in the April 30, 2008 edition of Tharp’s Thoughts), 2) the debt statistics for the US, 3) the five-week status on each of the major US stock market indices, 4) our four-star inflation-deflation model, and 5) tracking the US dollar. I also write a report on the strongest and weakest areas of the overall market as a separate SQN™ Report. Significant market changes may mean the SQN Report comes out more than once a month.

Part I: The Big Picture

December 2018 officially went on record as the worst December for the stock market since the great depression. The market finished December as a Strong Bear market type and with the major indices producing negative returns for the year. We didn’t officially reach the 20% decline but it was close (19.77%) for those who make records of an official bear market. January, however, was a totally different market with the major indices up over 5% for the month — a huge increase.

US Debt Clock

Recently, www.usdebtclock.org started listing US Assets. US assets (includes small business assets, corporate assets, and household assets) total $150.0 trillion. But then consider that our unfunded liabilities are $122.3 trillion. The total liability per taxpayer is $999,597 (and could actually be over a million by Feb 1st) and the total assets per citizen is $456.762. The trend towards higher debt has been going on for years and thus is likely to continue. But one day it will all collapse.

927 MU chart1

The people supported by the 122.2 million taxpayers include retirees, (53.0M) disabled people (10.2M), those getting food stamps (37.3M) or 100.5 million people. This is one trend that has been going down during the Trump years. In January 2018 it was 89.5% but now is 82.2%

Part II: The Current Stock Market Type Is Bear Volatile

The Market SQN scores for the various periods we monitor look like this for December and January —

  • 200 days – Bear in December, Neutral now
  • 100 days – Strong Bear last month, now Bear
  • 50 days – Strong Bear last month, now Bear
  • 25 days – Bear last month, now Bull (as of January 29)

It’s a great market for traders who know how to operate when there is a lot of volatility.

The chart below shows the weekly performance for the last twelve months. You can see the huge weekly bars from October through December and the move up for the last few weeks.

927 MU chart2

The chart below shows what happened to the Market SQN score (100 days) over the last year. As you can see, the Market SQN started climbing out of Strong Bear territory in late December but stayed in the Bear zone for much of January.

927 MU chart3

The last chart shows the market volatility. You can see that it has been in the Volatile range for most of the time since late October, how it really shot up in late December and has been heading down since then. It only entered the Normal range in the last day or two so I’m calling this market Volatile still until it stays in Normal for a longer period.

927 MU chart4

Lastly here are the weekly changes for the three major stock indices for 2019.

927 MU chart5

All three major markets indexes finished down on the year, however, January has shown a huge recovery with all three indices up over 5%. So did we just have a 19% correction and that was it?

Part III: Our Four-Star Inflation-Deflation Model

The four components of the model were mixed for the two time frame measures in January which resulted in a mildly inflationary score for January, one of just a few in the last six months —

927 MU chart6927 MU chart7

Our model showed pretty neutral inflation scores overall for 2018 but the Fed was raising interest rates because it theoretically saw inflation approaching. The Federal Reserve is a privately-owned entity and the large banks control its board of governors. My guess is that the large banks do not want Trump re-elected in 2020 and rate increases are a way of making sure his tax cuts don’t cause a stock market boom by the time he starts to run for re-election in the next year. At the same time, Trump has made threatening remarks about Powell’s job performance (as the Fed Reserve Chairman) so who knows what will happen?

In contrast to my model’s results, www.shadowstats.com measures inflation the way the government measured it in 1980 and shows inflation at about 10% right now. And on that basis, we have been in a recession since 2000 except for one quarter in 2003. Most people, of course, choose to believe the government statistics.

Part IV: Tracking the Dollar

Interest rates and tough tariff talk seem to support a quite strong US Dollar compared with other currencies. USD has been consolidating recently at a high level and it remains close to its yearly high.

927 MU chart8

Conclusion

I always find it interesting to look at what newsletter writers are saying. As I’ve mentioned, one prominent writer said (in October initially but still today) that the stock market will melt-up to new highs before a real bear market takes over. Others are forecasting a 50% bear decline in 2019.

It doesn’t really matter what others are predicting — look instead at what the market is doing. We had a decline at the end of 2018 that was almost enough to produce an official bear market (a 20% drop) and we’ve had an up market in January. What that means is anyone’s guess. Just base your trading upon what the markets are doing — which for now is a short term bull market. Here’s where my money is now —

  • about 50% of my account is cash equivalents yielding about 1.5%,
  • about 25% of my account is high yield investments (mostly yielding around 10%) and
  • about 25% is invested in equities.

I have no idea where the market is going, but I can live with that allocation for another two months – I leave home on Saturday for about 50 days. When I return, I’ll re-evaluate everything. In the meantime, Van will be away in India so you can expect the Indian Rupee to gain against the Dollar (seems to happen whenever I travel there). And perhaps the Dollar may even fall.

Until the March Market update, this is Van Tharp.

(RJ Hixson will write the February update.)

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