What a week for stocks and October continues to live up to its reputation for being a very volatile month. We saw most of the big gains from Thursday taken back on Friday after the Amazon and Google earnings reports disappointed giving poor guidance. A big midday rally failed as investors seemed reluctant to hold into the weekend. The Dow lost 296-points, or 1.19%, but there was a little more weakness in the broader indices and the tech heavy Nasdaq lost over 2%.
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[TD="align: center"] Daily TSP Funds Return
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[TD="align: right"] [/TD]
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[/TD]
[TD][/TD]
[TD="align: center"]
[/TD]
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The S&P 500 is not quite in correction territory officially but with 75% of all stocks being down 10% or more off their recent highs, this is a correction. The Nasdaq is down over 12%, and we know the small caps have been lagging both.
Unfortunately it sets up some tricky situations with some possible great opportunities, but equally dangerous possibilities. Had the 200-day EMA held I'd be more optimistic, but now we have to decide where this market wants to firm up. And if and when it does firm up, can the rallies hold? We've seen big rallies fail over the last couple of weeks. Eventually we will see some sort of meaningful rebound that will feel like it's over. It may last several days, a couple of weeks, or even a month or more, but that's when the test will really begin. We've been so used to pullbacks jumping right back to new highs, so if this one turns out to be different, we'll have a new kind of market on our hands.
I posted this the other day so sorry for the redundancy, but 2008 shows an example of "meaningful rebounds" I was talking about. Not that we're heading into a 2008-like bear market, but for demonstration: When you see a rally of 10-15% off the lows, your mindset isn't thinking "sell this." But being below the key moving averages, as they were in this chart, it can mean that is exactly what you need to do.
Of course we need that rally first and I'm not totally sure we're there yet. It's probably close but it doesn't mean the real pain won't come down the road. Again the 2008 chart shows that. Those are some big declines and big rallies leading up to October 2008 when the real damage started to get done. We may not be in the same situation as we were back then, so it's likely that it won't be as dramatic, but even a fraction of that action will be hair raising if this continues.
Have we had enough panic to make a low? After being pinned near and below 10 for almost all of 2017, the VIX (Volatility Index) hit 50 in February and that felt like real panic, and it was a low. On Friday the VIX topped out at about 27.5, and actually closed lower on the day. If we do rally without a panic low we could see that rally fail and turn back down again. By the way, the VIX hit 90 in October of 2008.
Here's a tweet from sentimenTrader.com on Friday:
So, be nimble. Be wise with your limited IFT's (interfund transfers). It's usually best to do the opposite of what the market is trying to get you to do. Try to not to sell any panic if you're in stocks - unless you're losing sleep. Try not to chase any big relief rallies. Things tend to turn right after emotional decisions are made, and with just 2+ IFT's per month, that can really mess things up for you.
There are many possibilities and nothing happens 100% of the time, but there are tendencies. If we get the anomaly, a market crash or something similar, then it's tough to be unscathed. But if you sit on the sidelines, you risk missing a 3-5% rally in a couple days. There's risk and reward, winners and losers, fear and greed, and it all gets magnified in these fast moving markets.
The S&P 500 / C-fund fell to a lower low on Friday but it did close off the lows with a spinning top candlestick formation, which can sometimes be a reversal pattern, but the bears may have something to say about that. The trend is down, and decisively so, but without too much of a stretch we could say that it has formed a falling wedge formation, and they tend to break to the upside. It would have to fight strong downward momentum to do so, but it is also quite oversold and due for at least some short-term relief.
The year to date chart shows the Friday's low held at the longer-term rising support line off the February and April lows. If that breaks there is not much support below, except for those two prior lows.
The DWCPF (small cap / S-fund) is very close to testing those February lows so it has fallen through a few serious support lines already. 1260 looks like the line in the sand for small caps.
The Dow Transportation Index did test the February low and held on Friday, which may be a good sign, but there's very little room for error.
The High Yield Corporate Bond Fund was down and fell below the 200-day EMA on Friday, but it continues to show a decent positive divergence compared to stocks. It is nowhere near the February lows so the credit market is not in as bad of shape as investors seem worried about. I see this as a plus, but it would be better to see it move back above the 200-day EMA this week.
The dollar had broken out to new highs on Thursday but it failed to hold those highs on Friday, and it may be looking to fill that small open gap just below 25.60. I think it may be important for the dollar to cool off, otherwise we could see commodities start to get beaten down too, and the market in general may not be too happy about that.
AGG (bonds / F-fund) rallied on the sell-off in stocks, but pulled back by the close and posted a negative reversal day after hitting the 50-day EMA. It did move above that one resistance line and there is an open gap below it so the breakout may not last.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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.
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[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
The S&P 500 is not quite in correction territory officially but with 75% of all stocks being down 10% or more off their recent highs, this is a correction. The Nasdaq is down over 12%, and we know the small caps have been lagging both.
Unfortunately it sets up some tricky situations with some possible great opportunities, but equally dangerous possibilities. Had the 200-day EMA held I'd be more optimistic, but now we have to decide where this market wants to firm up. And if and when it does firm up, can the rallies hold? We've seen big rallies fail over the last couple of weeks. Eventually we will see some sort of meaningful rebound that will feel like it's over. It may last several days, a couple of weeks, or even a month or more, but that's when the test will really begin. We've been so used to pullbacks jumping right back to new highs, so if this one turns out to be different, we'll have a new kind of market on our hands.
I posted this the other day so sorry for the redundancy, but 2008 shows an example of "meaningful rebounds" I was talking about. Not that we're heading into a 2008-like bear market, but for demonstration: When you see a rally of 10-15% off the lows, your mindset isn't thinking "sell this." But being below the key moving averages, as they were in this chart, it can mean that is exactly what you need to do.
Of course we need that rally first and I'm not totally sure we're there yet. It's probably close but it doesn't mean the real pain won't come down the road. Again the 2008 chart shows that. Those are some big declines and big rallies leading up to October 2008 when the real damage started to get done. We may not be in the same situation as we were back then, so it's likely that it won't be as dramatic, but even a fraction of that action will be hair raising if this continues.
Have we had enough panic to make a low? After being pinned near and below 10 for almost all of 2017, the VIX (Volatility Index) hit 50 in February and that felt like real panic, and it was a low. On Friday the VIX topped out at about 27.5, and actually closed lower on the day. If we do rally without a panic low we could see that rally fail and turn back down again. By the way, the VIX hit 90 in October of 2008.
Here's a tweet from sentimenTrader.com on Friday:
[TABLE="class: outer_border, width: 500, align: center"]
[TR]
[TD]# of times the S&P drops hard into a Friday: 72
# of times it crashed on Monday (> 2% loss): 13
# of times that loss was erased within two weeks: 11
[/TD]
[/TR]
[/TABLE]
[TR]
[TD]# of times the S&P drops hard into a Friday: 72
# of times it crashed on Monday (> 2% loss): 13
# of times that loss was erased within two weeks: 11
[/TD]
[/TR]
[/TABLE]
So, be nimble. Be wise with your limited IFT's (interfund transfers). It's usually best to do the opposite of what the market is trying to get you to do. Try to not to sell any panic if you're in stocks - unless you're losing sleep. Try not to chase any big relief rallies. Things tend to turn right after emotional decisions are made, and with just 2+ IFT's per month, that can really mess things up for you.
There are many possibilities and nothing happens 100% of the time, but there are tendencies. If we get the anomaly, a market crash or something similar, then it's tough to be unscathed. But if you sit on the sidelines, you risk missing a 3-5% rally in a couple days. There's risk and reward, winners and losers, fear and greed, and it all gets magnified in these fast moving markets.
The S&P 500 / C-fund fell to a lower low on Friday but it did close off the lows with a spinning top candlestick formation, which can sometimes be a reversal pattern, but the bears may have something to say about that. The trend is down, and decisively so, but without too much of a stretch we could say that it has formed a falling wedge formation, and they tend to break to the upside. It would have to fight strong downward momentum to do so, but it is also quite oversold and due for at least some short-term relief.
The year to date chart shows the Friday's low held at the longer-term rising support line off the February and April lows. If that breaks there is not much support below, except for those two prior lows.
The DWCPF (small cap / S-fund) is very close to testing those February lows so it has fallen through a few serious support lines already. 1260 looks like the line in the sand for small caps.
The Dow Transportation Index did test the February low and held on Friday, which may be a good sign, but there's very little room for error.
The High Yield Corporate Bond Fund was down and fell below the 200-day EMA on Friday, but it continues to show a decent positive divergence compared to stocks. It is nowhere near the February lows so the credit market is not in as bad of shape as investors seem worried about. I see this as a plus, but it would be better to see it move back above the 200-day EMA this week.
The dollar had broken out to new highs on Thursday but it failed to hold those highs on Friday, and it may be looking to fill that small open gap just below 25.60. I think it may be important for the dollar to cool off, otherwise we could see commodities start to get beaten down too, and the market in general may not be too happy about that.
AGG (bonds / F-fund) rallied on the sell-off in stocks, but pulled back by the close and posted a negative reversal day after hitting the 50-day EMA. It did move above that one resistance line and there is an open gap below it so the breakout may not last.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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.
