Hard act to follow

10/24/11

Stocks were up big on Friday, an unusual performance for an options expiration day in October. The Dow gained 267-points on the day - a surprise move considering what the markets are up against this week in Europe.

For the TSP, the C-fund was up 1.88% on Friday, the S-fund gained 2.24%, the I-fund made 2.02%, and the F-fund (bonds) slipped 0.04%.
For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.

How unusual was Friday's big gains? An options expiration Friday in October had only seen one gain of more than 1% in the last 29 years. There were five losses of more than 1% in that same period.

The S&P 500 moved above the 200-day EMA for the first time in over 3-months. The recent ~ two-week consolidation broke to the upside, and while this is a good sign - bull markets do have to get over the 200-day EMA first, it is not always a bullish indicator for the short-term.

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

According to sentimenTrader.com:

"The S&P 500 has now crossed over its 200-day exponential moving average for the first time in more than 50 days, while setting a 52-week low at some point during that stretch.

"This has happened 18 other times since 1928. There was usually a short-term dip right after the breakout, as the index had a positive return two days later 6 times, a 33% success rate.

"Longer-term the signals were mixed. Lately, they actually been pretty negative over the next month or so. In the past 30 years, such breakouts led to a positive one-month return only 2 out of 8 times. The two exceptions were in August '82 and August '84, both important long-term bottoms."

As I pointed out in the Weekly Wrap-Up, the Nasdaq has lagged a bit here after leading for most of the rally. It did not make a higher high on Friday as the S&P 500 did, but we are seeing a bull flag and a possible breakout from the flag. Also, the recent pullback dipped below the 200-day EMA but it is now back above it.

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

This chart of the Rydex Cash Flow ratio shows that investors are getting a little more aggressive again, taking money out of money markets and bearish funds and moving into bullish funds. We would use that is a contrarian indicator at extreme levels but it is now well off of the 1.38 extreme reading near the recent market low.

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

I have nothing to back this up; It's just something I noticed while looking at the NYSE overbought / oversold indicator on Sunday night... When the indicator moves up sharply and does not move right back down, but rather creates a little flag formation, it appears to be the sign of future strength. It seems to happen at intermediate and longer-term bottoms.

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

We're seeing a little flag being made right now, so I look at this as a good sign that this month's low could be the bottom for at least a few months.

I like what I see developing for a nice rally into the end of the year. But in the short-term we could see a little shake out. We've come a long way in a short amount of time and with the headlines and rumors continuing to pour out of Europe, and earnings season still upon us, we could see a little more volatility. I am almost certain that I will be looking to be a buyer of any weakness - as soon as we get into November and I get that new batch of IFT's.

The TSP Talk Sentiment Survey came in at 40% bulls, 49% bears, for a bulls to bears ratio of 0.82 to 1. That is a neutral reading in a bear market which means the system will remain 100% G Fund for this week.

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.

 

[RealMoneyIssues]

Just curious out of all those times where we recovered from a market bottom was the fed involved by manipulating the market? We are not where we should be and in the short term we will pay for that. After that drop, where next will depend on where our dollar manipulators allow us.. Real hard to trade a market where the market is not allowed to do what it wants but rather coerced to do what the fed wants... just my 2 cents.

 

[CallMeIshmael]

What resistance will there be (or was there) when the index prices reach the March and June 2011 lows?

S&P lows both months were 1250-60, right where the price is now (1254), so we don't know yet.

DJIA's was 11,555 in March, which marked the resistance in mid-August, September, and last week (and was slightly surpassed at closing two days in late August but quickly fell back). Lingering near that resistance level the last two weeks was different, though -- a plateau, not just a peak, something of a consolidation (relating to your NYSE over-bought mini-flags). Friday's breakout on high volume passed that resistance (along with the 200-day EMA, which was a few points higher than March's low). Today's (Monday's) follow-through on average volume makes the price 3% higher than that low. It is now right at June's double bottom, 11,865 and 75, practically speaking (11,913). So, it passed one level of resistance last week and is right at the other.

NASDAQ has been much more robust. It straddled the March and June lows of 2190 these past 10 weeks, closing above it 35 of the past 55 days, and closing below it for the last time 14 trading days ago. There's been no resistance at those lows whatsoever. Closing at 2384 today it has already nearly reached the three highs of Feb. (2403), April-May (2415), and July (2438). It's only 2% off it's 10-year high!

I share your skepticism about any sustained increases now. The next few days will tell us whether there is resistance or not. But considering the consolidation of the past two weeks, last week's breakout, and NASDAQ's totally ignoring resistance levels, I think I'll get in for a week or two despite the steep rise since Oct 4. Many breakouts fail and this one may, too. Or may not. We don't know. The signs I've pointed to suggest to me at least that the odds favor getting back in now.

(Is this one of those bear signs -- that when we think we're missing out, we jump in at the end of a rally and watch it go down?!)

 

[tsptalk]

The resistance could be temorary - or strong, we never know, but that resistance is also the neckline of the head and shoulders pattern that broke down in August.