Stocks rallied back in a post holiday reversal - at least from Friday's sell-off. The Dow gained 390-points as the volatility continues. There wasn't a whole lot of news but toward the end of the day the World Bank's chief economist suggested the Fed should hold off on interest rate hikes. That could be a market turning event, but how much should we be cheering an economy that is not strong enough to withstand a rate hike off of the current near 0% rate?
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The TSP stocks funds grabbed back a lot of the recent losses but the C and I funds are still negative for the month, while the S-find now has a small gain. Bonds were down yesterday.
The SPY (S&P 500 / C-fund) filled all of its open gaps with Tuesday's rally, but it also opened a new one in the process. This chart shows the SPY is below the 200, 50, and 20-day EMA's, and a possible large bear flag forming. It's hard to look at this too bullishly, but market bottoms do tend to manifest out of very oversold conditions, which this market had become.
Volume was light yesterday. As a matter of fact it was the lightest trading volume (for the SPY) since before the correction. As I mentioned yesterday, vacations are still not over and it takes a few days after Labor Day before things get back to normal, and yesterday's volume shows that.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The question on all of our minds is whether the S&P 500 will test the August 24 low made the morning of the that 1100-point flash-crash. Here's a chart of the SPY just after the infamous flash-crash in early May of 2010 reportedly caused by a single rogue trader. You would have thought a crash triggered by something mechanical would be the buying opportunity of a lifetime and you can see that stocks snapped back rather quickly in the days following the crash. But then something unexpected happened...
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
... The SPY went back down to test the flash-crash low in a matter of days despite the fact that there wasn't a good fundamental reason for the crash. Not only that, but investors and traders kept the market down for two-months, making lower lows, before it finally stabilized and bottomed. So it's more based on psychology and emotion and I don't know why this time would be any different.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Dow Completion Index (S-Fund) remains below the key moving averages and it looks like a big bear flag to me.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
We have been watching the QQQ (Nasdaq 100) which was clobbered during August's flash-crash but ran right back up to the 200-day EMA in a few days (just like in May 2010). What happens next could be the first clue for stocks - if the QQQ can get above the 200-day EMA and above that open gap.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The EFA (EAFE Index / I-fund) has a good sized open gap both above and below the current level. The one below was caused by Tuesday's positive open. But no matter how you slice it, this chart is in trouble although we know that bear market rallies can be strong.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Not surprising, the AGG (bonds / F-fund) fell when stocks rallied since investors were dumping stocks for bonds last week and yesterday they were likely reversing that decision.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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