Stocks pulled back sharply early Friday morning after multiple downgrades of European credit ratings. As has been the trend, we saw buyers step in as the day went on, although the indices still closed with modest losses.
For the TSP, the C-fund was down 0.49% on Friday, the S-fund lost 0.65%, the I-fund fell 0.55%, and the F-fund (bonds) gained 0.28%.
For the weekly and monthly TSP returns, please see our recent TSP Weekly Wrap-Up.
Last night Standard & Poor's downgraded the "creditworthiness" of the eurozone's rescue fund so we will have to see how the market digests this information today. It seems a lot of this bad news is already priced in the market as it really isn't much of a surprise to many people.
Technically, the S&P 500 did put in a lower low on Friday (compared to Thursday), which isn't a deal breaker yet, but the fact that it is doing it at resistance, and because the market is probably in need of a rest after the strong rally off of the December low near 1200, we could have the recipe for a pullback.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Support below is strong, but it is a pretty long way down as a pullback to where the blue support lines cross above is about 4% below the current levels.
Again, we've seen the breakout of a very bullish inverted head and shoulders pattern...
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
... but we will want to watch that narrow short-term trend created by the breakout because if that breaks (and it did intraday on Friday) we may be nearing the point where it is ready to pull back to test the neckline.
Because of the strong chart formation, I have been trying to rely less on the indicators thinking that price action is the ultimate indicator, but now that the chart may be nearing an area where a pullback would make sense, it may be time to heed the warning of the very concerning put/call ratio indicator.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The smart money is about as bearish as they have been in the last few years, while at the same time the dumb money looks to be getting on the giddy side. This is not a good formula or success.
I have posted this chart from Trader Fred a couple of times over the years. I don't know how or why it comes up with the readings it does, and it is not something that Fred depends on for buy and sell signals (he has his submodels for that) but when it is working and "on", the market strength indicator (blue line below) can lead the market. Seeing that the indicator has dropped sharply while the S&P is still near its highs gives me concern.
Fred updates this in every one of his reports and here is how he describes it:
"Historically, when the blue line is level or decreasing, it means any gains in the S&P 500 stocks have typically been difficult to retain.
"These indicators typically tend to be a forward-looking indicator of the market’s behavior by approximately two weeks to three weeks. However, during unstable market conditions, the forward time seems to increase or decrease by a factor of at least two (e.g., a month or more; a week or less. The S&P 500 Index and C Fund scales (black line) are on the right. Whether these trends will continue is unknown (question marks). All of these charts are provided for informational purposes only and are not meant to predict future market behavior."
The TSP Talk Sentiment Survey came in at 56% bulls, 35% bears, for a bulls to bears ratio of 1.60 to 1. That is a neutral reading in a bull market so the system will remain 100% S-fund for this week.
I am starting to lose some confidence in this rally, but if I do sell I will be out of IFT's for January. Another option is to keep a partial allocation in the stock funds and use our unlimited transfers into the G-fund to move out slowly should the rally continue. I will be watching the current short-term trend for signs of a breakdown.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
Doesn't bode well for our market.
