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April 5, 2006 — Issue #265

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In this Issue:

Workshop Enroll Now. 17 Steps to Becoming a Great Trader
Feature Article

Market Update Ending March 31, 2006, By Van K. Tharp, Ph.D.

Trading Education

Learn Something New Every Day

Trading Tip

When the Market Slops Around, by D. R. Barton, Jr.

Listening In Feedback From the Systems Development Course.
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

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The 17 Steps to Becoming a Great Trader Workshop

May 5-7, 2006, Raleigh, NC

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“I came to learn/confirm a valuable foundation and blueprint for becoming the best trader I can be. I got that and more. Good sharing of ideas with other attendees. Purpose for existence discussion was an enriching experience that I valued highly. Thank you.” — Paul Beattie, Canada, Past Attendee

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Feature

Tharp’s Thoughts

Market Update from March 31, 2006

1-2-3 Model Still in Red Light Mode

By
Van K. Tharp

Look for these monthly updates on the first issue of each month. This allows us to get the closing month data.  In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book:  1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our new four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I:  Market Commentary.

It’s now April.  Tax returns are due April 15th and by that date most people have deposited their retirement accounts into their plans.  That means that the mutual funds have less money to add to the market and the market tends to go down.  We are definitely in a secular bear market, so perhaps we can expect a few more weeks of slow up movement, but then the market should change.  We’ve now had 16 straight interest rate increases.  Remember what happened with interest rate increases in 1999.

Many of you might not believe we’re in a secular bear market. But, as I said last month, you could have gotten a better return from a six month treasury bill in 2004 than you could have gotten from exposing yourself to a lot more volatility in the stock market.  Hopefully that’s enough to catch your attention.

Part II: The 1-2-3 Stock Market Model IS IN RED LIGHT MODE. 

Let’s look at what the market has done over the last five weeks and compare that with where the averages were at the end of December for the past two years.  This is given in the next table. Incidentally, this data is calculated by hand, based upon last Friday’s close (i.e., March 31st, 2006), so there is always a possibility of human error in our numbers.

Weekly Changes in the Major Stock Market Indices

Date

Week Ending

DOW 30

Change

SP500

Change

NAS 100

(NDX)

Change

12/31/04

10,783.01

 

1211.12

 

1621.12

 

12/30/05

10,717.50

-0.6%

1248.29

+3.1%

1645.20

+1.5%

3/3/06

11,021.59

-0.3%

1287.23

-0.2%

1684.32

+0.6%

3/10/06

11,076.34

+0.5%

1281.42

-0.5%

1684.32

-2.1%

3/17/06

11,279.65

+1.8%

1307.25

+2.0%

1685.66

+2.3%

2/24/06

11,279.97

+0.0%

1302.95

-0.3%

1679.81

-0.3%

3/31/06

11,109.32

-1.5%

1294.87

-0.6%

1703.66

+1.4%

Efficient stocks.  What’s the market telling me in terms of efficiency?  Here, the data is very interesting.  I now have a proprietary indicator of the entire market – it’s efficiency.  What percentage of the stocks that I screen show positive efficiency?  What percentage of the stocks show negative efficiency?  I’ve only been doing this for about five months so I don’t have much historical data.  However, the market continues to be very strong.  As of Tuesday night (March 31st), 70.6% of the stocks in my database (over 4000 stocks) show positive efficiency, while only 29.4% of the market is negative.  This is a drop of about 10% from last month’s ratios.  Also there are 19 negative efficiency stocks below 10 and 226 positive efficiency stocks above 10.  Last month, there were 406 stocks above 10, so we are definitely seeing some shifting toward the negative.  And remember that we had the huge positive numbers without a very large movement to the upside. 

Let me give you an example of what’s showing up as positive and negative. (Click here to view the chart).  MICC, a foreign cell phone stock, shows up with the highest efficiency.  GPI, FLS, NEU, OYOG, ARP, and DDE are all examples of top efficiency stocks.  On the negative side, MLS, WON, and LBY show up as great examples of negative efficiency stocks.  They have nice downtrends that look like they could continue.  It’s in this group that you could find potential bankruptcy stocks.  However, my favorite last month, DLX, has a nice correction and I got stopped out.  But that happens with some regularity. 

Incidentally, since I trade this strategy, I may or may not, have positions in the stocks that I mention.  However, these examples are given for educational purposes and you should do your own due diligence if you decide to trade them.  

You may have noticed that I’ve mentioned a number of these companies from month to month.  Because I have mentioned them, you’ll find that it means that the price has either gone up nicely (in the case of positive efficiency stocks) or gone down nicely (in the case of negative efficiency stocks).  

Part III: Our Four Star Inflation-Deflation Model.

I now strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics.  

So far our models have been telling us that inflation/deflation is pretty steady, with a slight inflationary bias and that’s where secular bear markets tend to start. 

So what’s our new indicator telling us about inflation? 

1) The CRB Index

2) The Basic Materials Sector (XLB)

3) The London Price of Gold and

4) The Financial Sector (XLF)

Since the description of the model we’re now using is not in any of my books, I’ll continue to give it here. 

1)  The CRB Index.  I believe that the CRB index is the one we have currently that is the least manipulated by the government.  But what’s the best way to measure it?  For consistency, I plan to give two measurements.

·     Is the CRB index higher than it was six months ago?  If it is, we are on track for inflation.

·     Is the CRB index higher than it was two months ago? 

Now there are several ways to monitor these two indices.

·     If both differences are higher, we’ll count one star for inflation. 

·     If the six-month change is higher, but the two-month change is not, then we will only count ½ star for inflation. 

·     And if both the two and six month changes are lower, then we’ll be minus one for inflation.

·     However, if the six-month change is lower, while the two-month change is higher, then we’ll be minus ½ star for inflation.  Obviously, the two minus scores will point to deflation.

2) The Basic Materials Sector ETF (XLB).  In an inflationary environment, basic materials will definitely go up and this sector, to the best of my knowledge, is not manipulated by the government.  Thus, we will use this sector to monitor inflation and we’ll use the same measurements used for the CRB.  (1) Is the XLB higher than it was six months ago?  (2) Is the XLB higher than it was two months ago?  These two measurements give us four possible results.

·     If both differences are higher, we’ll count one star for inflation. 

·     If the six-month change is higher, but the two-month change is not, then we will only count ½ star for inflation.

·     And if both the two and six month changes are lower, then we’ll be minus one for inflation.

·     However, if the six-month change is lower, while the two-month change is higher, then we’ll be minus ½ star for inflation.  Obviously, the two minus scores will point to deflation.

3) The London PM Gold price at the end of each month.  Although the government can manipulate gold, I still like to look at monthly gold prices.  However, to be consistent, we’ll use the same two measurements that we’ve used for the other indices that we are monitoring.  (1) Is the price higher than it was six months ago?  (2) Is the price higher than it was two months ago?  Again, these two measurements give us four possible results.

·     If both differences are higher, we’ll count one star for inflation.  

·     If the six-month change is higher, but the two-month change is not, then we will only count ½ star for inflation.  

·     And if both the two and six-month changes are lower, then we’ll be minus one for inflation.

·     However, if the six-month change is lower, while the two-month change is higher, then we’ll be minus ½ star for inflation.  Obviously, the two minus scores will point to deflation.

4) The Fourth Measurement we’ll use is related to the Financial Sector of the S&P 500.

The financial sector (XLF) tends to do well when we have deflation and poorly when we have inflation.  Martin Pring, in fact, has used an index in which he divides the XLB by the XLF.  Since we already use the XLB, we’ll use the XLF by itself as well.  Again, we’ll use the change over six months and over two months.  However, the four possible outcomes will give us a different interpretation.

·     If both differences are higher, we’ll count one star for deflation (i.e., minus one for inflation). 

·     If the six-month change is higher, but the two-month change is not, then we will only count ½ star for deflation (i.e., minus ½ for inflation). And if both the two and six month changes are lower, then we’ll be plus one for inflation

·     However, if the six-month change is lower, while the two-month change is higher, then we’ll be plus ½ star for inflation.  Obviously, the two minus scores will point to strong inflation.

Okay, so now let’s look at the results for the last six months. 

Date

CRB

XLB

Gold

XLF

July 29th

317.78

28.64

429.00

29.93

September 30th

333.33

27.50

466.10

29.52

October 28th

330.68

27.48

470.75

30.31

November 30th

332.49

29.67

495.85

31.87

December 30th

347.89

30.28

513.00

31.67

January 31st

363.30

31.74

568.25

31.95

February 28th

353.27

31.06

556.00

32.63

March 30th

364.70

32.35

582.00

32.55

We’ll now look at the two-month and six-month changes during 2005, to see what our readings have been.

Date

CRB2

CRB6

XLB2

XLB6

Gold2

Gold6

XLF2

XLF6

Total Score

March 06

Higher

Higher

Higher

Higher

Higher

Higher

Higher

Higher

 

 

 

+1

 

+1

 

+1

 

-1

+2.0

The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom.  For the three months the model has shown a score of +2.  Everything is positive for inflation except that the XLF is still increasing.  However, it did show a one month downturn this month, so it might also begin to favor inflation next month.  And does that mean that the Fed will continue to increase interest rates?  

Part IV: Tracking the Dollar.

The U.S. dollar is beginning to look weak again.  Given the weak dollar and the fact that foreign stocks are BOOMING compared with the U.S. stock market, you could lose money even if the U.S. stock market does well this year.  Foreign based ETF such as ILF (Latin America with an efficiency rating of 14.54), EEM (Emerging Markets with an efficiency rating of 13.32), EWY (South Korea with a rating of 11.43), and EWZ (Brazil with an efficiency rating of 12.62), have efficiency ratings that are better than the efficiency ratings of most U.S. stocks.  Again, these are not recommendations.  Do your own due diligence before investing.

Look at the next table, showing the dollar index over the past year.

The Dollar Index

Month

Dollar Index

Jan 05

81.06

Feb 05

81.81

Mar 05

80.89

Apr 05

82.23

May 05

83.34

June 05

84.95

July 05

85.79

Aug 05

84.26

Sep 05

83.68

Oct 05

85.25

Nov 05

86.69

Dec 05

85.79

Jan 06

84.45

Feb 06

85.26

Mar 06

85.17

The dollar picture is still rather mixed.  However, with U.S. interest rates going high, the dollar becomes an attractive place for money to flow (as long as people believe the dollar is same) because they can get higher rates of returns.  For example, the six month t-bill rate is 4.85%, while the S&P 500 was only up 3% last year.  Where did you put your money?  The most attractive place appears to be foreign stock market ETFs.

Until the end of April update on the market….this is Van Tharp.

About Van Tharp: Trading coach, and author Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

Trading Education

Van Tharp's  Peak Performance Home Study Course

Learn Something New Every Day.

Peak performers know the value of knowledge. Wealth is built from ideas first. When you understand, and operate from that principle, you can really begin to move forward in your life.

In many ways, your wealth is what you know. Knowledge is much more important than money. For example, with two dollars you might be able to buy a fish and feed your family for a day. With the knowledge of how to catch fish, you could feed your family the rest of your life. And, although this example seems trivial—you may not even like fish—there are many examples that apply directly to you. With $800 you might be able to take one trade in the market, with a 50-50 chance of losing, but with that same $800 you could buy my home study course. Which do you think would have a more lifetime value? -- V.T.

Click Here to Learn More...

 

Trading Tip 

Trading Tip

When the Market Slops Around 

by D. R. Barton, Jr.

I can always tell when the market is having a tough time deciding where it wants to go.  I get lots of calls and e-mails asking "What’s going on?"  I can pontificate, make a strong case both ways, and even make sense some of the time.  But the fact is, this market has been tough to read over the past few months.  

Most of the best analysts I know are either flipping from bullish to bearish and back again, they’re in cash or they are playing short term strategies and not even trying to find a potential trend.  I fall into that last camp.

A good article in Barron’s this week talked about a trader with a good record from Minnesota who has been largely in cash since November and is basically taking far fewer trades than normal.

These market conditions certainly call for caution, especially for longer term players.  The strategies that I’ve heard about that are working now are shorter term plays (intraday volatility is has been rising the last couple of weeks) and any system that works well in choppy markets.  Band traders are doing well now, for example, although some intraday volatility is causing untimely stop outs on occasion.

What is important to remember is Van’s eleventh task of trading.  (For those of you who aren’t familiar with this term – Dr. Tharp's now famous Ten Tasks of Trading are listed in the first volume of his Peak Performance Home Study Course).  Those astute readers out there are saying, “But D. R. – there is no eleventh task.”  And you’d be right, except that right after the Ten Tasks discussion in the Home Study course, Van talks about one of the critical tasks that all traders have to incorporate in their plan – being out of the market.  He informally calls it the eleventh task of trading.

In general, all traders and investors need to take periodic breaks from the markets to clear their heads. This is particularly important when you are making psychological mistakes or have personal issues that could potentially interfere with your trading.

But another great time to be out of the markets is when your system or strategy isn’t performing well.  There is not a system out there that matches up well with every market environment.  If your system is not well suited to choppy markets, then this may be a good time to cut back on your position sizing or just sit on the sidelines and protect your equity.  Sometimes “doing nothing” is the most prudent action you can take!

Great trading,

D. R.

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

D.R. presents the Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 

 

Listening In...  

Van just wrapped up a three-day How to Develop a Winning Trading System That Fits You Workshop. 

Here's some of the feedback from the course.

"Excellent. Well worthwhile...Greatly increased confidence to trade safely and profitably." David Smithers, United Kingdom

"The best experience I've had yet in all the workshops I've attended." Rick Freeman, CA

"This course was excellent. I got even more out of it by taking it a second time. The course was well organized and is designed for everyone to participate, which helps you learn more." Chip Williamson, NC

"Excellent. Games reveal what's in our mind." Rick Redel, Canada

"Good course - I would do it again and recommend it to others. Thank you. I learned a lot." Rob Schmitz, FL

"I found it very helpful to actually practice creating a systems and feel that I am much better prepared to create my own. J.G. Cargill, VA

"I loved meeting all the folks of like mind, including Van." Gary Mason, VA

"Great workout! (Yes, workout since it was flexing our trading muscles." Jordi Llobet-Serra , Spain

"Very good, challenging class. Good value, sincere instructor and participants. Great learning environment." Scott Park, NC

Our workshops are so well-received. 

We'd love to have you join us for the workshop of your choice and then you'd see why we get such great feedback each time!

 

Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other

Special Reports By Van Tharp

Click below to read page one of each report, or to order. 

Self  Sabotage - Two Reports of Self Sabotage

Does Your System Still Work in Changing Markets?

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote of the Week

"Don't underestimate the value of Doing Nothing, of just going along, listening to all the things you can't hear, and not bothering." 

~Pooh's Little Instruction Book

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Free Trading Simulation Game

A computerized version of Van's famous "marble game." 

It is designed to teach you the important principles of proper position sizing. 

Download the 1st three levels of the game for free. Register now. 

 

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Featured Book:

The Why Cafe

by John Strelecky

A book about your Purpose for Living...

John has been a guest speaker at several of my workshops and his book has been an inspiration for me and for my staff. I bought 500 copies to give out to people.

Any of my subscribers who purchase this book will receive FREE access to John's latest audio  Winning the Game of Life (a $24.95 value). 

Click HERE for more details,

or BUY IT NOW.

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2006 
Workshop Mini-Schedule

May 5-7 17 Steps
June 3-5 Peak 101
June 7-9 Peak 202
Jul 14-16 You, Your Money
Aug 25-27 Systems Development
Sept 16-18 Day Trading
Oct 27-29 Mutual Funds & ETFs

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