Stocks stumbled on wall of worry on Monday after news that a large Chinese real estate company may default on their debt, and it seemed to be the straw that broke the back of the market after several smaller issues chipped away for a few weeks. The Dow lost 614-points, well off the nearly 1000 points it was down at the lows, so dip buyers didn't stay away for too long, but now we find out if the bears are in a position to sell the rallies in this new downtrend. Bonds and the dollar were up.
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Do we really need to care about Evergrande? It's China's second largest real estate development company that may default on $300 billion in debt. Why did that tank our markets? Possibly because our market needed a reason to correct. It has been a long time since we had a 5% to 10% pullback, and t'is the season, so why not use Evergrande as the excuse or catalyst, right?
When you get a sharp decline like yesterday, many investors, including some of the newer less sophisticated traders, start getting margin calls from their brokers, and sometimes that is why a sell off of yesterday's magnitude doesn't end in a day. Being forced to sell can exasperate a sell the rally environment, so I think a Turnaround Tuesday could be short-lived it we get one today.
As for market conditions, more than half of S&P 500 stocks are already at least 10% below their 52-week highs. This is despite the S&P 500 being at an all time high just two weeks ago, so this is becoming a healthy little pullback. The question is whether it turns into a 10% correction in the index, which means more to us who use the C-fund, and of course that makes a big difference on whether we should be buyers down at this level, or to be more patient and see if it goes lower.
We've talked about several of the issues surrounding the current environment. We mentioned that GDP estimates have been nearly cut in half in recent weeks. We know that the fiscal year ends at the end of the month and there are a lot of unknowns out there.
The democrats have proposed suspending the debt ceiling until December of 2022 and the republicans are not going to give them any easy any victories so of course they will use that as a bargaining chip to get the democrats to back off the $3.5 trillion spending bill that they've proposed. Since the debt ceiling is raised basically every year anyway, this seems to have just become a game for politicians to grandstand, but we know what the end result will be -- an ever increasing national debt. In the interim however, until they agree to anything, a government shutdown and government spending above the debt ceiling are in play, and that could scare the markets.
The dollar was up a little, as were bonds, and the yield on the 10-year declined. When stocks are down across the board and bonds and gold are some of the lone winners, you know you have an actual sell off. Not just one of those rotational moves where the Nasdaq is down and small caps are up, etc.
As you might expect, the internals were quite negative, and possibly so much so intraday yesterday that the oversold rally at the end of the day was only a mild surprise. As I said, this sets up the bears to potentially sell rallies. If they don't, and the bulls take charge again, this will be just another temporary blimp in the bull market that would not die.
There is an FOMC meeting this week with an interest rate and policy decision on Wednesday at 2 PM ET. There's a tendency to rally into these meetings, and of course Fed Chair Jerome Powell is always as dovish as can be, but let's see what he has to say about tapering the bond buying programs.
The S&P 500 (C-fund) gapped down lower at Monday's open and the selling was fairly relentless until the final 40 minutes of the day when either the dip buyers showed up, or short sellers did some covering. The latter would be a more bearish scenario. The 50-day EMA was taken out, and the 100-day EMA was tested rather quickly. By the close the 100 EMA held, and that may have set up some dip buying programs to kick in. The 100-EMA also held in March, and if that fails in the coming days, the 200-day EMA is about 5% lower.
The DWCPF (S-fund) took a 2% haircut but it closed well off the lows and survived a test of the rising support line, but not the 100-day EMA. However, we have seen that before in May, July, and August, so this is nothing new, and each of those led to higher prices rather quickly. So will it be different this time?
A closer look at the S-fund shows that we may have indeed been seeing a bear flag as we talked about in Monday's commentary, and not another "V" bottom. And if that is indeed a bear flag the downside target would be lower than yesterday's low. But there is also an open gap above at 2230 that could draw some attention at some point. Oh, and the second open gap on the downside did get filled (blue boxes.)
The EFA (EAFE Index / I-fund) was down nearly 2% and an earlier big rally in the dollar faded to help it close off its lows. That looks like a break in the trend, and there is another open gap down near 77.50 if this charts wants to really clean things up before turning higher.
The BND (bonds / F-fund) was up as we used to expect during sell offs in the stock market. That hasn't always been the case in the last year or so. It remains in that channel which could turn out to be some kind of a bearish flag.
The Dow Transportation Index broke down below the summer lows yesterday, and while it made a new closing low, it did close above the July intraday low creating a possible positive reversal day. So this is either a double bottom, or it is in big trouble if 14,000 can't hold.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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Do we really need to care about Evergrande? It's China's second largest real estate development company that may default on $300 billion in debt. Why did that tank our markets? Possibly because our market needed a reason to correct. It has been a long time since we had a 5% to 10% pullback, and t'is the season, so why not use Evergrande as the excuse or catalyst, right?
When you get a sharp decline like yesterday, many investors, including some of the newer less sophisticated traders, start getting margin calls from their brokers, and sometimes that is why a sell off of yesterday's magnitude doesn't end in a day. Being forced to sell can exasperate a sell the rally environment, so I think a Turnaround Tuesday could be short-lived it we get one today.
As for market conditions, more than half of S&P 500 stocks are already at least 10% below their 52-week highs. This is despite the S&P 500 being at an all time high just two weeks ago, so this is becoming a healthy little pullback. The question is whether it turns into a 10% correction in the index, which means more to us who use the C-fund, and of course that makes a big difference on whether we should be buyers down at this level, or to be more patient and see if it goes lower.
We've talked about several of the issues surrounding the current environment. We mentioned that GDP estimates have been nearly cut in half in recent weeks. We know that the fiscal year ends at the end of the month and there are a lot of unknowns out there.
The democrats have proposed suspending the debt ceiling until December of 2022 and the republicans are not going to give them any easy any victories so of course they will use that as a bargaining chip to get the democrats to back off the $3.5 trillion spending bill that they've proposed. Since the debt ceiling is raised basically every year anyway, this seems to have just become a game for politicians to grandstand, but we know what the end result will be -- an ever increasing national debt. In the interim however, until they agree to anything, a government shutdown and government spending above the debt ceiling are in play, and that could scare the markets.
The dollar was up a little, as were bonds, and the yield on the 10-year declined. When stocks are down across the board and bonds and gold are some of the lone winners, you know you have an actual sell off. Not just one of those rotational moves where the Nasdaq is down and small caps are up, etc.
As you might expect, the internals were quite negative, and possibly so much so intraday yesterday that the oversold rally at the end of the day was only a mild surprise. As I said, this sets up the bears to potentially sell rallies. If they don't, and the bulls take charge again, this will be just another temporary blimp in the bull market that would not die.
There is an FOMC meeting this week with an interest rate and policy decision on Wednesday at 2 PM ET. There's a tendency to rally into these meetings, and of course Fed Chair Jerome Powell is always as dovish as can be, but let's see what he has to say about tapering the bond buying programs.
The S&P 500 (C-fund) gapped down lower at Monday's open and the selling was fairly relentless until the final 40 minutes of the day when either the dip buyers showed up, or short sellers did some covering. The latter would be a more bearish scenario. The 50-day EMA was taken out, and the 100-day EMA was tested rather quickly. By the close the 100 EMA held, and that may have set up some dip buying programs to kick in. The 100-EMA also held in March, and if that fails in the coming days, the 200-day EMA is about 5% lower.
The DWCPF (S-fund) took a 2% haircut but it closed well off the lows and survived a test of the rising support line, but not the 100-day EMA. However, we have seen that before in May, July, and August, so this is nothing new, and each of those led to higher prices rather quickly. So will it be different this time?
A closer look at the S-fund shows that we may have indeed been seeing a bear flag as we talked about in Monday's commentary, and not another "V" bottom. And if that is indeed a bear flag the downside target would be lower than yesterday's low. But there is also an open gap above at 2230 that could draw some attention at some point. Oh, and the second open gap on the downside did get filled (blue boxes.)
The EFA (EAFE Index / I-fund) was down nearly 2% and an earlier big rally in the dollar faded to help it close off its lows. That looks like a break in the trend, and there is another open gap down near 77.50 if this charts wants to really clean things up before turning higher.
The BND (bonds / F-fund) was up as we used to expect during sell offs in the stock market. That hasn't always been the case in the last year or so. It remains in that channel which could turn out to be some kind of a bearish flag.
The Dow Transportation Index broke down below the summer lows yesterday, and while it made a new closing low, it did close above the July intraday low creating a possible positive reversal day. So this is either a double bottom, or it is in big trouble if 14,000 can't hold.
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
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
