09/22/11
Stocks were modestly lower to flat yesterday until the Fed's policy statement was read just before 2:30 PM yesterday. How did investors react? It was a twist and shout sell.
The Dow lost 284-points. For the TSP, the C-fund dropped 2.94% yesterday, the S-fund sank 3.37%, the I-fund lost 2.75%, and the F-fund (bonds) added 0.33%.
The S&P 500 is back down testing the lower end of the bear flag, which happens to also be the neckline of two bearish head and shoulders patterns.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
We have a small head and shoulders, within a larger head and shoulders pattern, and they are within a large, mature, bear flag, and we're in a bear market. I don't know how we can expect this to end well. The good news is a good 4% to 7% flush out while testing the lows could set up a nice buying opportunity.
As for the action following the FOMC announcement - according to SentimenTrader.com:
"There has only been one other time that the S&P sank more than 2% while the yield on 10-year notes also sank more than 2% on the day the FOMC announced a rate decision. That was 12/11/07, after which the S&P rose slightly for two days, then fell hard in the weeks following.
"If we look at 1% moves in each, then 8/13/02 and 1/27/04 pop up in addition to the date mentioned above. There wasn't really any consistency in forward performance, though for what it's worth (probably not much), over the next two months all three instances saw the S&P lose at least -5% during the next two months."
The NYSE overbought/oversold indicator is back down near -500, which is very oversold in a bull market, but just modestly oversold in a bear market. Besides the sharp market sell-off in early August, this level of oversold did produce a bounce, but like the indices, this ob/os indicator tends to test the lows before bottoming.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
As I said above, I would rather see a flush out that tests the lows and moves this indicator to negative 1000 or 1500. I would feel better about buying at that point.
I mentioned the recent strength in the dollar yesterday and how it is affecting the prices of commodities. Copper is a commodity that is a very good indicator of economic conditions. When the economy is strong, the demand for copper rises. When the economy is weak, the demand lessens. You can see the problem here as it is at a one year low.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The surprise for the market would be to see the S&P 500 push toward the upper end of the bear flag again. I think we could see the S&P move above that bear flag some time before the end of the year, but probably not until the lows are tested first. I'm looking for a breakdown - but I've said that before and the market seems to enjoy proving me wrong.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
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