Look for these monthly updates in the first issue of each month. This allows us to get the closing month’s 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 four star inflation-deflation model, 4) what the US dollar is doing, and 5) the five strongest and weakest areas of the market.

Part I: Market Commentary

We’re in for a real ride in the markets right now.  We’ve already had a 10% correction followed by a bounce.  Is this going to be like July when the market almost corrected 10% and then went on to make new highs?  Or is this market going into a major downturn?  I don’t know the answer, except that 1) we are in a secular bear market; 2) we are in a dollar crash; 3) we have a tremendous subprime crisis; 4) real inflation is over 10% and 5) we’re probably in (or close to) a recession even by the government’s standards.  They’ll probably tell us about it in a few months. 

So let’s look at what the market did in November.

Part II:  The 1-2-3 Stock Market Model Is Really Borderline but Officially in RED Light Mode. (I'll explain why in a minute. Stocks tend to go down 9% per year in red light mode.)

The 1-2-3 Model is in borderline mode between yellow and red.  The Fed is not in the way and has actually started to lower interest rates.  That’s positive.  However the other two indicators seem to vacillate between positive and negative.  The market has had a 10% correction and then recovered.  It’s flirting with the moving average, but it’s officially below it.  However, that tends to lower the PE ratio of the S&P 500 to near 17, which Steve Sjuggerud considers to be positive.  Also, you only get an official reading of the S&P 500 PE ratio every quarter and its usually long after the quarter has ended.  Based on the latest readings, the PE is 17.1, so it’s officially expensive.  I personally would call the market very borderline.  Both of these could move slightly and we’d be in green light mode, so it’s a very mixed bag right now.  Just remember we’re in a secular BEAR market.

Let’s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year.  These data are given in Table 1.

Table 1:  Stock Performance Over the Last Month
	Dow 30		S&P 500		NASDAQ 100
Date	Close	% Change	Close	%Change	Close	% Change
Close 04	10,783.01		1211.12		1621.12
Close 05	10,717.50	-0.60%	1248.29	+3.07%	1645.2	1.50%
Close 06	12,463.15	16.29%	1,418.30	13.62%	1,756.90	6.79%
10/26/2007	13806.7		1535.28		2194.59
11/2/2007	13595.1	-1.53%	1509.65	-1.67%	2213.86	0.88%
11/9/2007	13042.74	-4.06%	1453.7	-3.71%	2034.3	-8.11%
11/16/2007	13176.79	1.03%	1458.74	0.35%	2048.62	0.70%
11/23/2007	12980.88	-1.49%	1440.7	-1.24%	2028.9	-0.96%
11/30/2007	13371.72	3.01%	1481.14	2.81%	2089.1	2.97%
Year to Date		4.65%		2.50%		15.79%

All three averages are still up on the year,  but the DOW 30 and the S&P 500 are only up a small amount – less than the market decrease over the week of November 9th. 

Strongest and Weakest Components of the Market  

I am starting a new feature here, listing the five strongest and the five weakest components in the market at the time of this update.  These can change daily, but the information will be accurate as of the publication of this update.  Table 2 shows the five strongest components this month as compared with last month.

Table 2: Strongest and Weakest Market Component
Five Strongest Components
Market	Nov Strength	Market	Oct Strength
India	87	Oil	95
China	71	India	73
LT  Treasuries	66	Commodities	66
Hong  Kong	66	Brazil	66
Spain	60	Gold	65
Five Weakest Components
Sweden	21	Real Estate	7
Canada	22	US Sm Cap Value	12
Taiwan	25	Mexico	15
Real Estate	25	US Sm Cap Blend	16
S. Korea	28	Sweden	16

Perhaps you can begin to understand why the Japanese are starting to focus their assets on emerging markets instead of the U.S. Also notice how some of the strongest markets can drop dramatically.  Oil is now 38 and commodities are now 50 after being in the top five at the end of October.  This is because short term swings have a lot more play in the rating scale than long term swings.  By the way, this information is for educational purposes only, so you can understand the big picture and its importance.

Incidentally, some of you have asked how all of this is calculated and other details.  This is pretty similar to Ken Long’s world mo

Part III: Our Four Star Inflation-Deflation Model

As I’ve stated many times in these monthly updates, we are in an inflationary bear market.  The bear market is not necessarily reflected in prices, but in PE ratios.  PE ratios will continue in a downtrend even though the Dow is making new highs.  Inflation is obvious, but simply masked by government statistics.  Okay, so now let’s look at the results for the last six months.  And remember that the Fed has now chosen to produce inflation and a strong dollar devaluation over the pain of the subprime crisis.

Date	CRB	XLB	Gold	XLF
Dec-05	347.89	30.28	513	31.67
Dec-06	394.89	34.84	635.5	36.74
May-07	407.58	40.72	659.1	37.69
Jun-07	410.36	40.5	650.5	36.18
Jul-07	424.52	39.42	665.5	32.9
Aug-07	413.49	39.15	672	33.75
Sep-07	447.57	42.11	743	34.32
Oct-07	453.26	43.86	789.5	33.73
Nov 07	451.26	41.65	783.50	31.00

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

Date	CRB2	CRB6	XLB2	XLB6	Gold2	Gold6	XLF2	XLF6	Total Score
October	Higher	Higher	Lower	Higher	Higher	Higher	Lower	Lower
		+1		+1/2		+1		+1	+3.5

The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom.  The model once again shows that inflation is winning slightly. 

Both Gold and Commodities fell over the last month, but I suspect this was due to the subprime crisis starting to liquidate their holdings.  Gold stocks, for example, took huge hits (much more than gold). 

Last month I mentioned John Williams' web site, www.shadowstats.com. John Williams looks at the real statistics the government doesn’t want you to know about.  For example, the CPI (if calculated the way it was in 1990) currently suggests that inflation is running over 10% per year.  And M3 (which the government stopped publishing because they said no one looks at the data) suggests that inflation might be as high as 14%.  I suspect that 14% is probably more accurate because even the government’s old way of looking at the CPI was not particularly accurate.  However, the data clearly suggests that we’re in an inflationary bear market in which the stock market is not even keeping up with real inflation (much less the decline in the dollar as discussed below).  In such a market we could easily see a DOW of 20,000, but that would probably be worth about 5,000 in today’s market (plus the dollar could easily have lost real value versus other currencies as indicated below).

Part IV: Tracking The Dollar

With the Federal Reserve lowering interest rates, I would now expect currency traders to start selling the dollar and moving to currencies that pay a better interest rate.  Look at the data in the chart because it really says it all.

Month	Dollar Index
Jan 05	81.06
Jan 06	84.29
Jan 07	82.37
Feb 07	82.07
Mar 07	81.23
Apr 07	79.87
May 07	79.20
Jun 07	78.93
July 07	77.51
Aug 07	77.51
Sep 07	75.91
Oct 07	73.93
Nov 07	72.20

When last month’s issue was written in early November, the dollar was just under 73.  The dollar is still in a plunge, and I wouldn’t be surprised to see oil valued in Euros at some time in the future.  The dollar’s status as the world’s reserve currency will be very much in doubt in the near future.  But the problem is that there is not really a sound currency to take its place.  So what would take its place?  Gold?

And remember that crisis always implies that an opportunity exists somewhere. 

Until next week, this is Van Tharp.