12/09/11
Stocks pulled back yesterday on disappointment out of Europe. We talked yesterday about optimism being a little too high for the European meetings, but this pullback may be producing a good opportunity.
A late report of the ECB backing off from doing any aggressive bond purchasing sent stocks down sharply in the last 30 minutes or so of trading, and the Dow ended the day down 199-points.
For the TSP, the C-fund dropped 2.11% yesterday, the S-fund fell 2.81%, the I-fund lost 2.54%, and the F-fund (bonds) gained 0.20%.
I guess I better be careful about what I ask for. I thought we could see a "sell the news" reaction with optimism being so high going into the meetings in Europe, and the S&P dropped right to upper level that I have been looking for (1222 to 1234). That is where the 200-day EMA and the support from the upper end of the bull flag (red) are and I am thinking the worst could be over already, although a test of the 50-day EMA at 1223 is a possibility. Anything worse than that and I may have to wave the white flag.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
December has a well-deserved reputation for being positive yet surprisingly, yesterday was the 53rd time since 1928 that the S&P 500 has dropped -2% or more in the month. More surprises - January, February and July all had fewer -2% drops than December had.
According to sentimenTrader.com, when the S&P 500 lost -2% in December, performance in the day(s) ahead was mixed, about in line with random. But holding until year-end (no matter when in the month the drop occurred) resulted in 75% winning trades, averaging +1.9%.
If it was a -2% down day accompanied by at least 90% of NYSE flowing into declining issues, then holding 'til year-end resulted in 8 winning trades out of 10 since 1940, averaging +5.0%. The losers were -0.9% in 1941 and -2.1% in 2007. Not bad.
The market leading Dow Transposition Index also tested its 20 and 200-day EMA's yesterday. Should it hold, we could be seeing a bullish inverted head and shoulders pattern forming.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Now, here are some concerns:
The CBOE put/call ratio (dumb money) is the most bullish it has been since the July highs. We seem to have a positive trend change in this ratio, which is a sign of bull market action, but it is at the top of the new ascending channel so that could mean the dumb money is a little too bullish right now.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The smart money was getting quite bullish at the end of November, but they have backed off. That's not a terrible thing as the smart money will get more and more defensive as the market rises, and they will probably be the most bearish at a market peak so I think the market has some room to move higher. If we start seeing 1.75 to 2.0 again, it will be time to think about staying defensive.
The TSP Talk Sentiment Survey came in at 47% bulls, 41% bears, for a bulls to bears ratio of 1.15 to 1. That is a sell signal in a bear market which means the system will remain 100% G Fund for next week.
A little follow up on the 10-year T-note yield. As we've been saying, stocks could be in some trouble if this dipped below 2.0% again and as we can
see, it fell below the 2% level during yesterday's stock market sell-off.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
I see this as a news driven emotional move so we'll have to see if the yield, as well as stocks, can bounce back quickly, or if this dip is for real.
The S&P 500 is flirting with my pullback targets so I may do some buying again Friday or Monday morning. We'll see. Did I mention that economic data was pretty good too?
Thanks for reading! Have a great weekend!
Tom Crowley
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