Stocks opened flat on Friday after a sharp overnight sell off in the futures had completely recovered by the opening bell. However, the selling pressure resumed once trading began. Big tech is taking the brunt of the selling as it took the Nasdaq and S&P 500 for a bearish ride. Meanwhile, away from big tech, the Dow, the Russell 2000 small caps, and the Transportation Index were all up on the day, so what has been leading on the way up, is lagging on the way down.
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There is a tendency for stocks to do better during options expiration week, than the week after expiration. That didn't work well in March as it was the opposite effect and I believe the better way to look at it is that stocks actually tend to fade (move in the other direction) the action of expiration week, during the week after. Since stocks went down last week during options expiration, perhaps the bulls have a slight breeze at their backs this week with the market being quite oversold in the short-term.
An oversold market can produce snap back rallies, but they can be dangerous markets because there is clearly a shift going on. Volatility tends to pick up and the risk of a washout type of sell off is possible.
According to sentimenTrader.com, 73% of stocks in the S&P 500 have reached oversold conditions and when that has happened in the past, when the S&P is still within 10% of its highs, stocks did tend to stabilize in the short to medium term. These 21 signals go back to the 1920's.
Chart provided courtesy of www.sentimentrader.com
On the other hand, this market may be in the early stages of a correction, if it is in one at all. Right now I'd call this a pullback after months of very bullish action.
History tends to repeat itself, although rarely exactly, but this recent action feels very similar to the action we saw last summer. The circumstances may be different, the news is different, there may be a lot of differences, but the charts capture it all and perhaps the reactions we saw back in 2023 will be similar to what we see in the near future. If it's not, then we know this is a different monster, but if it is...
I have already talked ad nauseam about the outside negative reversal day that we saw on April 4, comparing it to the similar July 2023 negative reversal. So far that has played out nearly precisely the same.
In August of 2023 the pullback reached that moving average, paused, then reversed higher for two weeks.
If there's one difference so far it's that the S&P 500 closed below the moving average on Friday. Is that because it was a higher volume expiration day? Maybe.
Strong markets like we've had over the last 6 months rarely die a quick death. The bulls put up a fight. Sometimes they win the battle, sometimes they don't. I think we should know soon enough if the bulls are going to try to put up a fight after 6 straight negative days in the S&P 500, and 11 of 15 down days in April.
What happens after a relief rally, I don't know and if stocks are going into a new downtrend it can be very tricky to try to time it as the moves are wide, and there can be huge midday reversals that add to the confusion. Notice in the 2023 chart above that there was another negative outside reversal day within the relief rally. That was a warning sign but it's not always the end of a move higher, just like it took a few days for the April and July 2023 negative reversal to actually head lower again.
So, we have a potentially dangerous stock market with the possibility for relief in there. The question I, and everyone else wish they knew the answer to is if buying this decline is the right thing to do, or is catching a falling knife too dangerous and waiting for evidence of a reversal up more appropriate?
We all have our own tolerance for risk and so how we approach this individually may be different.
The 10-year Treasury Yield and the dollar both look like they don't want to come down as they consolidate near their recent highs. The chart also shows there is some room to fall if they want to rest and retest prior breakout areas, which is common.
We'll look at the daily charts down below, but for now let's look at the less noisy weekly charts of the three TSP stock funds.
The S&P 500 (C-fund) weekly does show that it had been moving up more swiftly and well above resistance and some old breakout levels, and that means support is a little lower than we see on the DWCPF (S-fund) and EFA (I-fund) charts, which may both be testing some support right now.
Support doesn't have to hold, but even if it doesn't, the support levels we see above could be a springboard for any kind of relief rally. From there, we could see the bears come right back into the picture like we saw last summer, or the bulls could just resume the rally and we'll look at this pullback and wonder what the fuss was all about.
The S&P 500 (C-fund) broke down a couple of weeks ago, falling below some of the shorter-moving averages (not shown) that had been holding for months, and then last week it cut right through 50-day EMA quite convincingly without so much as an attempt from the bulls to hold it. Now it is already down to the 100-day EMA and, if the big money game players want to make it difficult for the bulls, they could push it below that after falling below the bottom of the open gap from February on Friday. That's usually done to run stop orders in an attempt to buy shares at prices even lower than support. That's what triggers washout reversals. Intraday breakdowns are not as important as where the indices close. That 4944 area would be a place that the bulls would want to see holding on a closing basis.
DWCPF (S-fund) almost filled its open gap and that could get done today. This one has fallen hard over the last couple of weeks, and while due for some relief, dead-cat bounces from severe drops don't always hold, although they can be impressive in size.
The EFA (I-fund) was up slightly on Friday and it has been attempting to hold that 100-day EMA, but there is an open gap just below it and it wouldn't be a surprise if they try to tag that at some point, but whether it's during this first push lower, or after a relief rally remains to be seen.
BND (Bonds / F-fund) has been in a descending channel all year. Ironically it looks like a huge bull flag, but while it's in that flag it doesn't feel bullish.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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[TD="width: 284, align: center"] Daily TSP Funds Return
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There is a tendency for stocks to do better during options expiration week, than the week after expiration. That didn't work well in March as it was the opposite effect and I believe the better way to look at it is that stocks actually tend to fade (move in the other direction) the action of expiration week, during the week after. Since stocks went down last week during options expiration, perhaps the bulls have a slight breeze at their backs this week with the market being quite oversold in the short-term.
An oversold market can produce snap back rallies, but they can be dangerous markets because there is clearly a shift going on. Volatility tends to pick up and the risk of a washout type of sell off is possible.
According to sentimenTrader.com, 73% of stocks in the S&P 500 have reached oversold conditions and when that has happened in the past, when the S&P is still within 10% of its highs, stocks did tend to stabilize in the short to medium term. These 21 signals go back to the 1920's.
Chart provided courtesy of www.sentimentrader.com
On the other hand, this market may be in the early stages of a correction, if it is in one at all. Right now I'd call this a pullback after months of very bullish action.
History tends to repeat itself, although rarely exactly, but this recent action feels very similar to the action we saw last summer. The circumstances may be different, the news is different, there may be a lot of differences, but the charts capture it all and perhaps the reactions we saw back in 2023 will be similar to what we see in the near future. If it's not, then we know this is a different monster, but if it is...
I have already talked ad nauseam about the outside negative reversal day that we saw on April 4, comparing it to the similar July 2023 negative reversal. So far that has played out nearly precisely the same.
In August of 2023 the pullback reached that moving average, paused, then reversed higher for two weeks.
If there's one difference so far it's that the S&P 500 closed below the moving average on Friday. Is that because it was a higher volume expiration day? Maybe.
Strong markets like we've had over the last 6 months rarely die a quick death. The bulls put up a fight. Sometimes they win the battle, sometimes they don't. I think we should know soon enough if the bulls are going to try to put up a fight after 6 straight negative days in the S&P 500, and 11 of 15 down days in April.
What happens after a relief rally, I don't know and if stocks are going into a new downtrend it can be very tricky to try to time it as the moves are wide, and there can be huge midday reversals that add to the confusion. Notice in the 2023 chart above that there was another negative outside reversal day within the relief rally. That was a warning sign but it's not always the end of a move higher, just like it took a few days for the April and July 2023 negative reversal to actually head lower again.
So, we have a potentially dangerous stock market with the possibility for relief in there. The question I, and everyone else wish they knew the answer to is if buying this decline is the right thing to do, or is catching a falling knife too dangerous and waiting for evidence of a reversal up more appropriate?
We all have our own tolerance for risk and so how we approach this individually may be different.
The 10-year Treasury Yield and the dollar both look like they don't want to come down as they consolidate near their recent highs. The chart also shows there is some room to fall if they want to rest and retest prior breakout areas, which is common.
We'll look at the daily charts down below, but for now let's look at the less noisy weekly charts of the three TSP stock funds.
The S&P 500 (C-fund) weekly does show that it had been moving up more swiftly and well above resistance and some old breakout levels, and that means support is a little lower than we see on the DWCPF (S-fund) and EFA (I-fund) charts, which may both be testing some support right now.
Support doesn't have to hold, but even if it doesn't, the support levels we see above could be a springboard for any kind of relief rally. From there, we could see the bears come right back into the picture like we saw last summer, or the bulls could just resume the rally and we'll look at this pullback and wonder what the fuss was all about.
The S&P 500 (C-fund) broke down a couple of weeks ago, falling below some of the shorter-moving averages (not shown) that had been holding for months, and then last week it cut right through 50-day EMA quite convincingly without so much as an attempt from the bulls to hold it. Now it is already down to the 100-day EMA and, if the big money game players want to make it difficult for the bulls, they could push it below that after falling below the bottom of the open gap from February on Friday. That's usually done to run stop orders in an attempt to buy shares at prices even lower than support. That's what triggers washout reversals. Intraday breakdowns are not as important as where the indices close. That 4944 area would be a place that the bulls would want to see holding on a closing basis.
DWCPF (S-fund) almost filled its open gap and that could get done today. This one has fallen hard over the last couple of weeks, and while due for some relief, dead-cat bounces from severe drops don't always hold, although they can be impressive in size.
The EFA (I-fund) was up slightly on Friday and it has been attempting to hold that 100-day EMA, but there is an open gap just below it and it wouldn't be a surprise if they try to tag that at some point, but whether it's during this first push lower, or after a relief rally remains to be seen.
BND (Bonds / F-fund) has been in a descending channel all year. Ironically it looks like a huge bull flag, but while it's in that flag it doesn't feel bullish.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
