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 [You must be registered and logged in to see this link.] His newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.Article

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Market Update for the Period Ending December 31, 2013 Market Condition: Bull Quiet

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. Consequently, 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, however, your beliefs are not similar to mine, then this information may not be useful to you. If you are inclined to perform 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. Know that I acknowledge that these are my beliefs and that your beliefs may be different.
These 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 and readable on our web site), 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, and 4) the movement of the dollar. I now report on the strongest and weakest areas of the overall market in a separate SQN® Report. I may come out with that report twice a month if there are significant market changes.—Van K. Tharp
Part I: Commentary—The Big Picture
We’ve been in a bull market for some time.  Based upon percentage gain, 2013 was the best year since 1997.  We haven’t had a 10% correction in the S&P 500 since 2011.  The Dow ended 2013 at 16,0459 (but remember that the components of the Dow were changed before that occurred).  However, the market has not reached a new high over the 2000 peak if you adjust for inflation, either the government version of it or based upon real CPI statistics.  Essentially, we have had a huge run-up because the Fed has pumped money into the economy.   And instead of lending the money, banks have put it into the stock market.   It can’t go up forever, but the banks can keep doing it for a lot longer than you or I might suspect.
The Fed has just found a new tool to make adjustments.  It can adjust the rate of interest it currently pays on deposits it holds for the banks.  That rate is currently 0.25%, and the Fed is thinking about reducing it to zero.   In other words, it’s telling banks to keep their money and invest it elsewhere.  And now banks are retaliating by threatening to charge depositors for holding their money.    
Richard Russell recently suggested that the US could fix its debt problem overnight by unilaterally resetting the price of gold to a much higher number.  He says that’s been done twice before, so why not do it again?   And then it hit him that maybe the US just doesn’t have any gold left.   About six months ago, the price of gold dropped $250/oz overnight because someone sold 500 tons of gold at the market.  If the world reserve is 57,299 tons, then that trade amounted to 0.87% of the world’s total supply of gold being sold with no limit.  In other terms, that trade was about 20% of the 2013 world production of gold.  Who would do that?  Who has the ability to do that?  Europe isn’t organized enough to do that. It could have been the US.   But why?
No one really knows how much gold the US has, but I’ve seen the following statistics in various articles.  Take these figures with a grain of salt because I have no idea how accurate any of it is … and nor does anyone else.  The following table is how much gold might exist in the US.

US Location	Amount of Gold
Fort Knox	4,600 tons
West Point	1,781 tons
Denver	1,368 tons
Other	1,000 tons
Banks in low Manhattan (probably representing deposits from other countries)	10,000 tons
Total	18,749  (8,749 probably belonging to US)

Here is another version of the same data on a world basis, courtesy of the world debt clock.

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If you translate the holdings into tons, you get the following table.   And if this is right, the US holds 15.7% of the world’s gold reserves which is still a pretty substantial position.   But what if it holds only 10% of that figure?   Or what if “they” have sold it all?  

Country	Ounces	Tons
US	287,475,135	8983.6
Germany	119,838,518	3745.0
Internation Monetary Fund	99,460,161	3108.1
Italy	86,659,576	2708.1
France	86,079,521	2690.0
China	37,257,493	1164.3
Switzerland	36,762,971	1148.8
Russia	36,241,866	1132.6
Japan	27,046,353	845.2
Netherlands	21,649,341	676.5
India	19,713,364	616.0
Euro	17,747,303	554.6
Total		27372.9
World Reserve	1,833,562,722	57298.8
Production (2013)	92,095,427	2878.0

To show how these are all just estimates, I recently heard that the People’s Bank of China has 4,800 tons of gold which is a lot different than 1,164.3 tons shown above. 
Let’s say the US has 8,749 tons.   At $1,250/oz., that represents about $350 billion dollars held in gold.   When you consider that our current debt is $17.27 trillion and that our unfunded liabilities are $127 trillion, $350 billion is almost a joke.   Yet in 2013, the price of gold dropped about 29%.  Hmm.
Equities, yes, are in a bull market but it’s a bull market denominated in the US dollar which could easily end its reign soon as the world’s reserve currency.   Indeed, Gabriel Grammatidis teaches our FOREX course and predicts that (long-term) the Yen, Euro, and the US Dollar will all collapse, possibly in that order.   The Japanese managed to depreciate their currency by about 23% over the last year.  So then does the Yuan take over?
Let’s look at the state of the United States chart courtesy of the debt clock.   One month was missed while I was gone, but it’s not that important as the trends are obvious.

The State of the United States
Month Ending	National Debt	Federal Tax Revenue	Federal Spending	Trade Deficit	Debt Per Family	Unfunded Liabilities	Workforce (taxpayers)	People supported by them
July 31 2012	$15.93 trillion	$2.364 trillion	$3.632 trillion	$810 billion	$684,405
Dec 30 2012	$16.42 trillion	$2.452 trillion	$3.540 trillion	$740.7 billion	$732,086
July 31, 2013	$16.89 Trillion	$2.73 trillion	$3.535 trillion	$703 billion	$748,458		115.2 million	109.9 95.4%
Aug 31, 2013	$16.92 trillion	$2.76 trillion	$3.541 trillion	$693 billion	$748,889		114.2 million	109.6 95.6%
Sep 30, 2013	vvvvvvv	vvvvvvv	vvvvvvvv	vvvvvvv	vvvvvvvv	Unfunded Liabilities	vvvvvvvvvv	vvvvvvvvv
Oct 31, 2013	$17.13 trilion	$2.81 trillion	3.516 trillion	$685 billion	$752,131	No data	114.6 million	109.0 95.1%
Nov 30, 2013	$17.21 trillion	$2.82 trillion	$3.480 trillion	$690 billion	$752,510	$126.8 trillion	114.8 million	109.1 95.0%
Dec 31, 2013	$17.27 trillion	$2,82 trillion	$3,480 trillion	$692 billion	$751,294	$127.2 trillion	115.0 million	108.5 94.3%

They have changed the debt clock a little to include US unfunded liabilities.   Right now our total unfunded liabilities are $127.2 trillion with most of that being Medicare and prescription drug liability at $88 trillion and $22 trillion, respectively.   The Social Security unfunded liability is only a little less than our total debt at $16.8 trillion.
The US population remains at 317 million with taxpayers standing at 115.0 million.   The oldest Boomers continue to leave the work force and retirees now stand at 47 million.   Disabled people collecting social security stands at 14.3 million, while food stamp recipients total 47.2  million (with all three being up over the last month) so that’s 108.5 million people that are supported either by the government or the 115 million taxpayers.   But really about 11.5 million taxpayers pay 90% of U.S. taxes.  This means that 11.5 million workers are supporting 108.5 million other people through the government.   Do these numbers add up to you?  Do they seem sustainable?
Today, our official debt is over $17 trillion (up $50B from last month) and it’s now going up almost a trillion dollars every year.   Furthermore, the debt situation is so bad that the Federal Reserve has had to drive short term interest rates to almost zero and long term rates to very low numbers.   This is killing the U.S. dollar and interest rates have nowhere to go but up.   In fact, betting on eventual higher interest rates is about as close to a certain bet (long-term) as you could ever make. 
Part II: The Current Stock Market Type Is Bull Quiet
Each month, I look at the market SQN® score for the daily percent changes in the S&P 500 Index over 200, 100, 50 and 25 days. For our purposes, the S&P 500 Index defines the market.    
The 200-day market SQN score, as well as the 50-day score, are both in strong bull mode, while the 100 and 25-day SQN scores are just in the bull range.  Market volatility remains very quiet so for now, this keeps us very safe.

(To see the three following charts stacked and aligned, click here)

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You can see that we had a few weeks in the strong bull range, and then retreated back into bull.   And the last chart is our volatility chart.  You can see that it’s been a long time since the market has been in any way volatile.

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(To see the three previous charts stacked and aligned, click here)

Below is a chart of the weekly changes in the three major US Indices.     As you can see, all three indices are up substantially on the year with double digit gains.   The S&P 500, which best represents the market, was up over 30% on the year.  Was your performance as good as the major indices in 2013?

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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 the inflation rate can help traders understand big-picture processes.  
The CRB:CCI index was discontinued on April 17th, 2013.   As a result, I switched to the ETF called DBC to look at commodity prices.  I kept the prior years’ CCI data (from 2005 to 2012) as a reference since the DBC data does not go back that far.

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Looking back over the most recent two-month and six-month periods provides the current month’s score, given in the table below.

Month	CRB2	CRB6	XLB2	XLB6	Gold2	Gold6	XLF2	XLF6	Total Score
	Higher	Lower	Higher	Higher	Lower	Lower	Higher	Higher
Dec-13		-1/2		+1		-1		-1	-1.5

Again, it was another month where the deflationary forces seem to be winning.  During 2013 we have had one inflationary month, 10 deflationary months, and one month being zero.  In fact, the last 8 straight months have been deflationary.  And as we continually point out, one of the main reasons is that banks are not lending.  The money multiplier put out by the St. Louis Fed is still at 0.7 rather than the normal 3.0 that we tend to see which stimulants are really working.

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Shadowstats.com tracks the real data rather than the government manipulation of the data, suggest that 1) current inflation is running around 9% (see the chart above) and as the second chart shows (below), we’ve been in a recession (using real inflation to calculate GDP growth) since the secular bull market started.   Actually, we have had one quarter in 13 years where we have not been in a recession.  

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Part IV: Tracking the Dollar
Since it peaked in July, the USD has been on a downtrend that recently gathered strength.  The large drop came shortly after Fed Reserve Chairman Bernanke announced the continuation of the QE program.  The dollar, the Euro, and the Yen are all extremely weak currencies.  All three will probably fail, but who knows which one will fail first.   The dollar does have some bias for survival since much of the world’s debt is still dollar denominated.   As the Fed is forced to buy more and more of the US's debt, however, that situation will change. 
Below is a chart of the US Dollar Index.   If it dropped below 78, it would probably be a serious sign.

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General Comments
Longer term, the competitive stimulus measures from central banks propels the big picture.  Short term, multiple markets continue to offer plenty of opportunities to prepared traders.  The keys are awareness, preparation, and execution. 
These monthly market updates are not intended for predictive purposes; rather, they’re intended to help traders decide which of their trading systems should work best in the current market conditions. In bear markets—which are almost always volatile by nature—shorter-term strategies, and those that allow going short, tend to work better than long-only or intermediate/longer-term systems.
Which of your trading systems fit this current market type? Of course, this question implies that you have multiple trading systems and that you know how they perform under various market conditions. If you haven't heard of this concept or the other concepts mentioned above, read my book, Super Trader, which covers these areas and more, so that you can make money in any kind of market condition.
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 2013. Did you make money? If not, then do you understand why not? The refinement of good trading skills doesn't just happen by opening an account and adding money. You probably spent years learning how to perform your current job at a high skill level. Do you expect to perform at the same high level in your trading without similar preparation? Financial market trading is an arena filled with world-class competition. Additionally, and most importantly, trading requires massive self-work to produce consistent, large profits under multiple market conditions. Prepare yourself to succeed with a deep desire, strong commitment and the right training.

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 [You must be registered and logged in to see this link.] His newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.