August 2015 Market Update: Market Type is Bear Volatile by Van K. Tharp, Ph.D.

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August 2015 Market Update:
Market Type is Bear Volatile

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. 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, and 4) tracking the dollar. I will now report on the strongest and weakest areas of the overall market as a separate SQN™ Report. And that may come out twice a month if there are significant market charges.

Part I: The Big Picture

US equities have gone down 5.7% from where they were 100 days ago. Last month, they had gone up 2.92% in the previous 100 days. In the last 100 days now, there have been five new all-time high closes, the last one being 71 days ago. The S&P 500 made no new high closes in June or July or August. This market is no longer very deceptive; it is quite clearly a bear market now.

Debt Clock

The State of the United States
Month Ending	National Debt	Federal Tax Revenue	Federal Spending	Trade Deficit	Debt Per Family	Unfunded Liabilities	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	Unfunded Liabilities	115.2 million	109.9M 95.4%
Dec 31, 2013	$17.27 trillion	$2,82 trillion	$3,480 trillion	$692 billion	$751,294	$127.2 trillion	115.0 million	108.5M 94.3%
Aug 31, 2014	$17.70 trillion	$2.97 trillion	$3.53 trillion	$706 billion	$757,297	$118.0 trillion	116.5 million	104.5M 90.0%
Sep 30, 2014	$17.77 trillion	$2.98 trillion	$3.53 trillion	$707 billion	$730,321	$116.3 trillion	116.7 million	104.9M 90.0%
Oct 31, 2014	$17.9 trillion	$3.05 trillion	$3.53 trillion	$703.5 billion	$729,784	$115.4 trillion	116.9 million	105.1M 89.9%
Nov 29, 2014	$18.0 trillion	$3.07 trillion	$3.55 trillion	$710.8 billion	$729,477	$115.7 trillion	117.1 million	105.1M 89.7%
Dec 31, 2014	$18.04 trillion	$3.08 trillion	$3.57 trillion	$713.2 billion	$733,741	$92.5 trillion	117.3 million	104.4M 89.0%
Jan 31, 2015	$18.10 trillion	$3.11 trillion	$3.59 trillion	$318.7 billion	$732,620	$94.1 trillion	117.5 million	105.7M 90.0%
Feb 28, 2015	$18.14 trillion	$3.13 trillion	$3.60 trillion	$725.0 billion	$732,054	$95.3 trillion	117.7 million
Mar 31, 2015	$18.17 trillion	$3.15 trillion	$3.63 trillion	$723.3 billion	$757,614	$95.7 trillion	117.8 million	105.4M 89.5%
April 30, 2015	$18.21 trillion	$3.11 trillion	$3.61 trillion	$720.3 billion	$759,875	$96.0 trillion	118.1 million	105.3M 89.1%
May 29, 2015	$18.25 trillion	$3.12 trillion	$3.62 trillion	$720.3 billion	$761,889	$96.5 trillion	118.3 million	107.1M 90.5%
Jun 30, 2015	$18.29 trillion	$3.14 trillion	$3.63 trillion	$728.4 billion	$752,894	$97.0 trillion	118.5 million	105.1M 88.7%
Jul 31, 2015	$18.32 trillion	$3.15 trillion	$3.65 trillion	$723.4 billion	$753,212	$97.2 trillion	118.7 million	105.0M 88.4%
Aug 31, 2015	$18.37 trillion	$3.16 trillion	$3.66 trillion	$729.7 billion	$753,533	$97.5 trillion	118.9 million	104.9M 88.2%

In the last three months, our official debt has gone up by $120 billion. Furthermore, the tendency for the government to manipulate our unfunded debt amount seems to have tapered off as our debt has steadily increased and is now at the highest it’s ever been.

Incidentally, usdebtclock.org says there are 118.5 million taxpayers and that 160 million people receive government support. I’m not sure how they determine that recipient figure as some of their groups seem duplicated. Because of this, I add together US Retirees (48.8 million) food stamp recipients (45.3 million) and disabled people drawing social security (10.8 million). I don’t think there is any overlap here. These groups total 104.9 million and that’s why I say that they consist of 88.2% of the taxpayers. I could also include all government employees (23.7 million) as among those supported by taxpayers — but they do pay taxes too. As you think about these numbers remember another important group — the top 10% of the taxpayers (11.9 million) who pay most of the tax revenue.

Part II: The Current Stock Market Type Is Bear Volatile

My market type classification is not predictive but rather descriptive – rather than telling us what’s going to happen, it simply tells us what’s going on now.

I look at the Market SQN score for the last 100 days for the S&P 500 as my major indicator of market type. But we also look at the Market SQN® score for 25, 50 and 200 days. Right now the 200-day and 100-day market types are both Bear Volatile. The 50-day market type is Strong Bear Volatile and the 25 day is Bear Normal. Calling the current volatility “normal” might be misleading but for the 25 day volatility measurement, I use a very short term ATR percentage which went to very volatile last week and has come back to normal for the moment. My guess is that in another few days or sooner, the short term measurement will be volatile or very volatile again.

The graphs below include a chart of weekly bars for the S&P 500 over the last year, the Market SQN^® score for 100 days, and the ATR% (20 day) volatility.

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Below is a chart of the weekly changes in the three major US Indices. All three indices were up on the year effective last month. On Friday, August 28th the Dow was down 9%, the S&P 500 6%, and the NASDAQ 100 was up 1%. As of the open on Sept. 1, however, the NASDAQ 100 was down on the year.

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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 understanding inflation and deflation can help traders understand some important big-picture processes. See the tracking table below.

Date	CCI> DBC	XLB	Gold	XLF	Total Score
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
Dec ‘09	484.42	32.99	1,104.00	14.1
Dec ‘10	629.53	38.47	1,410.25	16
Dec ‘11	564.37	33.5	1,574.59	13
Dec ’12 CCI>DBC	556.08 27.79	37.54	1,564.80	16.39	1
May ‘14	26.03	49.08	1250.50	22.29	+0.0
June ‘14	26.58	49.64	1315.00	22.74	+2.0
Jul ‘14	25.32	48.65	1285.25	22.41	+1.0
Aug ‘14	25.03	50.53	1285.75	23.36	-2.0
Sep ‘14	23.22	49.59	1209.10	23.17	-2.0
Oct ‘14	22.31	48.40	1164.25	23.84	-2.5
Nov’ 14	20.42	49.16	1182.75	24.40	-2.5
Dec ‘14	18.45	48.59	1199.25	24.73	-3.0
Jan ‘15	17.40	47.69	1260.25	23.01	-3.0
Feb ‘15	18.17	51.49	1213.70	24.35	-1.0
Mar’15	17.01	48.78	1187.00	24.11	-3.0
Apr’ 15	18.29	50.42	1180.25	24.13	-1.5
May 15	17.71	50.61	1190.50	24.60	+0.5
Jun’ 15	18.00	48.39	1176.00	24.38	-1.0
Jul’ 15	15.73	45.94	1098.40	25.18	-2.5
Aug’ 15	15.69	43.36	1135.00	23.42	-2.5

Here are the model components and how the prices looked at the end of August compared with two months back and six months back.

Month	DBC2	DBC6	XLB2	XLB6	Gold2	Gold6	XLF2	XLF6	Total Score
	Lower	Lower	Lower	Lower	Lower	Lower	Lower	Lower
Aug. 15		-1		-1		-1		+1/2	- 2 1/2

Notice that 11 out of the last 12 months have shown deflation. It’s interesting that in such an economic climate as this, we still get rumblings about the Fed (from their conference at Jackson Hole, WY last week) raising interest rates as soon as next month. But I’m not sure that’s really going to happen. Other countries are continuing to try to export their deflation to the US by devaluating their currencies.

Part IV: Tracking the Dollar

The dollar is stronger compared to where it was 200 days ago and weaker compared to where it was 100 days ago. Overall, we have both a down market in stocks and a relatively weak dollar. The strong uptrend in the US dollar definitely seems to be over and right now it seems to be in a wide trading range from 98 to 93. What’s next? I have no idea as this letter is not about prediction, just what is happening.

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Conclusion

I provided the following quote in last month’s market update —

A famous trading guru once said that quiet markets are followed by volatile markets. And even I am willing to say that. So these sideways quiet markets will give way to chaos at some time in the future and that will present some great trading opportunities.

I could not have remotely guessed that a volatile market was only two weeks away and that we’d be in a Bear Volatile market type within a month’s time. For an idea about how fast the shift to volatile conditions has happened, here’s a price chart for the volatility ETF VXX with 60 minute bars for the last three weeks.

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Since the bear really started two weeks ago, VXX has gone crazy. There have been three clear breakouts, indicated by arrows, with the latest on September 1st. During the last two weeks VXX has nearly doubled from 15.48 to 29.34. I’ve been using this to hedge our retirement portfolio — but my position hasn’t been nearly big enough given what has happened.

The market type could be Bear Volatile for some time to come but really, that’s just a possibility, not a prediction.

Ironically, not many people have come to our Bear Market Workshops in the last year. Perhaps that will change for the next workshop scheduled for November — or perhaps people won’t attend it heavily until the end of the bear market. That would reflect normal crowd psychology. For example, at our stock market trading workshop in March of 2000, we had 71 people in attendance — the most attendees for any workshop we’ve ever had.

Until next month’s update, this is Van Tharp.

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 new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.

August 2015 Market Update: Market Type is Bear Volatile by Van K. Tharp, Ph.D.

August 2015 Market Update: Market Type is Bear Volatile by Van K. Tharp, Ph.D.

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