Dip

8/24/12

Stocks pulled back yesterday after a weaker than expected jobless claims report, and even a weaker dollar couldn't help. The Dow lost 115-points on the day.
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[TD="align: center"] Daily TSP Funds Return

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[TD="align: right"] G-Fund:
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[TD="align: right"] 0.0036%
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[TD="align: right"] F-fund:
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[TD="align: right"] 0.17%
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[TD="align: right"] C-fund:
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[TD="align: right"] -0.81%
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[TD="align: right"] S-fund:
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[TD="align: right"] -0.68%
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[TD="align: right"] I-fund:
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[TD="align: right"] -0.66%
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More returns​

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The S&P 500 broke below the rising wedge. Rising wedges tend to breakdown so this isn't a big surprise, but now the test begins on the 20 and 50-day EMA's. They have held for the most part going back a few months, with short stints below them before the rally resumed.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Last week I talked about how news events can produce sharp drops in slow consolidating markets, but that they can usually be bought pretty safely. This drop may be one of those times.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I do believe that bull markets don't die easily, but the longer-term is still looking fuzzy all depending on things like the election results, taxes, healthcare, etc. I can't see making many positive predictions without investors getting some certainty first.

So I'm looking for buyable dips during the short term like now, but it's more foggy looking further out.

Sentiment has been getting more bullish, although I'm sure yesterday's sell-off may have changed that a bit. This data from sentimenTrader.com kind of confirms the short-term positive / long-term "iffy" outlook.

Chart provided courtesy of www.sentimentrader.com Commodities

This positive sentiment scenario looks for a short term positive bias, but things go below the random readings looking out more than a month.

Bonds have rallied off of support as this chart looks almost too good [technically] to be true.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

There are a few open gaps down below near support, so perhaps some backing and filling is in order. If those gaps do get filled (near 111) it will produce another test of support, and how that test plays out will be a good tell for stocks and bonds.

The dollar dropped sharply again yesterday, but it actually closed near it's highs putting in a possible reversal day. But the dollar ETF - UUP, fell below the 200-day EMA and closed below it.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

That could be a long term bearish sign for the dollar, but let's give it a few days to get back above it before declaring it dead.

Thanks for reading! Have a good weekend!

Tom Crowley


Posted daily at www.tsptalk.com/comments.html

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[valleymd]

Tom,

Excellent commentary as always, I like it when you add in a historical table from Sentimentrader.com. I have often wondered though, how the present situation played out. I would like to see revisits to the sentimentrader tables after several months to see how the present day market reacted compared to the historical averages. It looks like the current market will do well in the next month, but falter in the longer term. Fill in the question marks in 3-6 months and see where we are.

 

[tsptalk]

You are in good company, valleymb. Trader Fred has asked me this in the past. But I'm going to answer in away that might surprise you. My opinion is, it doesn't matter.

All I really care about is today and the future. I don't feel it is worth the time to figure out how an old signal played out. The next time the situation plays out, we'll just have another data point to add to the statistic.

For example, if you flipped a coin that seems to have uneven weight 1000 times and 600 times it came up heads, and 400 times it was tails, how much does it matter what 1001th flip is? The next time you flip the coin you're still looking for tails to come up 40% of the time.

When it comes to the market, we don't have that kind of data, but it's the same philosophy. It's just another data point to add to the existing data that can be used to make the next decision. Other than a "need to know" stat, to me it's just another piece of a puzzle for the next buy / sell decision.

I hope that makes sense. If I'm missing something, let me know.

 

[Sensei]

For example, if you flipped a coin that seems to have uneven weight 1000 times and 600 times it came up heads, and 400 times it was tails, how much does it matter what 1001th flip is? The next time you flip the coin you're still looking for tails to come up 40% of the time.

This reminds me again of a topic I always wonder about in regards to the stock market. It's a statistical concept called "regression to the mean". You can look it up to get the full explanation, but basically the idea is that - over time and with increasingly large sample sizes - results of almost everything random has a tendency to even out to 50/50. The fact is that the more often you flip a coin, the more likely the results will end up 50/50. Unless there is a factor that skews those results, like the weight of the two sides is uneven and tends to produce more heads than tails.

So when I look at the seasonality charts, I wonder if we shouldn't look at it contrarily. Like the last day of this month is skewed way to the positive. Statistically speaking, we should expect the next few Augusts to produce negative results on the last trading day. Unless, of course, there is a factor that creates the positivity. Like the end of the quarter (I don't think August is, but just giving an example) or earnings reports, or something else that always happens on the last day of August. If there is no such unique factor, I'm not sure we should expect that last day to be green.

But then, I'm a complete novice when it comes to the stock market, and maybe a statistician's perspective is the wrong one to take when it comes to making money.

Hope I'm making sense. I'd love to hear other opinions. Maybe there's a thread where it's been discussed in the past. Thanks!

 

[tsptalk]

Very interesting concept, Sensei - especially regarding seasonality. I don't have time to comment right now - hopefully later.

 

[tsptalk]

Again, interesting concept. I think you may have something on the seasonality, except perhaps when it comes to holidays, end of quarter as you mentioned, last day of the month, first of the month, because of window dressing, etc. Then there are the options weeks during the month, so there is some validity to those trends, but I can't say we haven't witnessed periods when the market is doing the opposite of what seasonlity would suggest.

The last trading day in Augist is often the Friday before Labor Day weekend.