09/07/11
I would not count on a big turnaround, but stocks did put in an impressive intra-day reversal as the Dow managed to close down "just" 101-points after being down 300 earlier.
For the TSP, the C-fund closed down 0.74% yesterday, the S-fund lost 0.53%, the I-fund dropped 3.85% with the dollar rallying and the strength in U.S. stocks coming late in the day, and the F-fund (bonds) added 0.02%.
The reversal does look good on the charts but we know markets don't go straight up or straight down. After losing 120-points on Thursday, over 250-points on Friday, and being down over 300-points on Tuesday morning (holiday Monday), a snap back rally seemed reasonable.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The late rally seemed more like a short squeeze. Depending when you read this, we will hear, or will have already heard, the ruling out of Germany's supreme court regarding the legality of the bailouts in Greece. We also have President Obama's jobs creation speech tonight, so the bears did not seem to want to be caught too short going into these two potential market movers, and they may have covered their short positions by doing some late buying.
I get a lot of nice feedback from readers and I know we have a wide range of investment knowledge out there so let me take a second to explain what a short position and short covering is for those who may not know.
Most of you know that investors have the ability to buy or sell stocks or ETFs (Exchange Traded Funds). We can't do it on our TSP accounts, but investors can actually sell a stock before they own it. Buying or owning a stock is consider "being long" or "going long". Selling a stock before you own is called "going short".
If a trader or investor believes that stock ABC is going to go down from its current $20 a share price, they could "short" 100 shares, for example, for a total of $2000 (100 x $20). Let's say the the stock goes down to $18. The investor could cover the short position for a gain. To do that they would buy stock ABC for $1800 (100 x $18). Despite doing it in reverse, since they bought it for $18 a share and sold it for $20 a share, their account increased by $200 ($2 x 100 shares) after the trade.
A short covering rally can be triggered by many investors getting out of their short positions in a short period of time, and to do that, they are buying. As they buy to cover their short positions, the market might continue to rally causing other "shorts" to cover their positions, thus a short covering rally can be quick and sharp. It kind of felt like that late Tuesday.
The sell-off last Friday created yet another open gap on the chart of the Nasdaq. The first two have closed and I suppose 2544, the top of the open gap, is a possible upside target for any follow-through rally.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
As usual, the 10-day put / call ratio moving averages of the smart and dumb money have been moving in opposite directions. The dumb money (Equity put/call) had become more bullish during the recent rally up to the top of the bear flag and 50-day EMA.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The smart money (OEX put/call) became more bearish during that same rally.
The dumb money has not been this bullish since late July / early August, while the smart money has not been this bearish since early July.
The bond market closes earlier than the stock market so it had closed before the late rally in stocks yesterday. The yield on the 10-year T-note made a new closing low yesterday and technically, that is bearish for yields, but bullish for bond prices and the F-fund.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
There is now possible overhead resistance in the yield near 2.0%.
I won't rule out the possibility that yesterday's reversal was something meaningful, but I am quite skeptical. The S&P 500 is still in a big bear flag, it is trading below the 20, 50, and 200-day EMA's, and the 50-day EMA is below the 200-day EMA. This tells me to expect a bearish outcome. Unless the indicators get overly bullish and oversold, and that hasn't happened yet, I don't see too many catalysts in the near future for the market. Perhaps we could see that change during earnings season in October.
Thanks for reading! We'll see you back here tomorrow!
Tom Crowley
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