An alarming explosive rally in the last 20 minutes of trading on Friday turned a strong day for stocks into the largest point gain ever. The Dow jumped 1985-points, a record, but that was still quite a bit short of Thursday's 2350-point loss. We haven't seen back to back positive days in the S&P 500 since February 12, so today's another test for this new bear market.
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The action has been so out of the ordinary that we have to go back to 2008 to find comparisons in volatility and some indicators extremes, and while the charts and technical analysis may match up to some degree, I would caution over comparing the two from a fundamental standpoint because one was a near collapse of the global financial system, and one is a virus that will likely slow down the economy for a quarter or two.
We had warnings signs for months with commodity prices like oil and copper falling, and yields dropping and the inversion last year, so we saw the possibility of a recession this year. That does not mean we saw what happened coming. Rather than a sluggish market and a modest correction, we got a virus related, all out bear market, manifest in a matter of days.
Because of the sensationalized, "if it bleeds, it leads" 24/7 media coverage of the coronavirus, the stock market will probably start to bounce back a lot sooner than the news might suggest, and that will be to the detriment of the mom and pop investors who may have sold in a panic this month. I'm not sure exactly when that recovery will occur, but one day mom and pop will look at the stock market and say... "how did the market rally back so much already? Should we be buying back in?"
The point is, don't rely on the news to determine when and where to put your money. Keep an eye on the market itself. It will tell you, although the volatility will make it tough to trust for a while.
Last Monday I posted this chart and I said, "we're at least half way down the slope now, and the capitulation / despondency will come after the next rally fails and we test the lows again." Now I'd say we're in panic / capitulation mode and a bounce and retest of the lows could finish the process.
It's easy to say but even knowing that it's coming, the action may be too chaotic for anyone to manage it with any ease at all. It could be days, or maybe weeks. In prior situations it took about two months from a low, a bounce, and another test of low, but this decline was so swift I wouldn't be surprised if everything is hastened - except for the perpetuating fear thing that will probably keep mom and pop from being involved until the market has already turned around. The point is, by the time we get an "all's clear" from the government on the coronavirus, the stock market will have likely shot up already.
Probably not a major fact in this environment, but there is an unusual positive blip on the March seasonality chart for this week. But after that, not so much. It is an options expiration week.
Chart provided courtesy of www.sentimentrader.com
The Fed has an FOMC meeting on this week's schedule and we should see another big interest rate cut on Wednesday, possibly down to 0% (Update: They just did it Sunday evening). They've been doing other things like another bond buying program and basically another round of Quantitative Easing. If they announce more of that I can't see the market ignoring it, but first we have to get by the emotional roller-coaster. It is setting up a monster growth environment, once we can get through the virus chaos.
Buckle up. It's going to be a wild one. The futures hit limit down right away after a weekend of fear mongering news and Fed rate cut to 0%.
The S&P 500 (C-fund) opened sharply higher on Friday, faded and tested Thursday's low, then battled back to close at the highs. It was a very constructive day from a technical analysis standpoint, but we've seen two of these setups fail already in March as the S&P 500 has been trying to put together consecutive winning days for over a month now. Volume was high on Thursday and Friday, similar to the levels we saw at the reversal on February 28th, and it feels like a temporary low, but the news continues to be bad and investors are obviously nervous. Friday's rally filled that large open gap from Thursday.
The weekly chart of the S&P 500 shows that it nearly came down to test the bottom of the 2018 lows before reversing upward and putting a nice positive tail on the weekly candlestick.
This weekly line chart is showing only the end of week closing prices and it's quite interesting where the S&P 500 closed on Friday. That's a 4 year rising trendline.
The DWCPF (S-fund) lagged a bit but the positive reversal was enough to create an "outside" positive reversal day, where the high and lows exceeded Thursday's high and low, and it closed above Thursday's high. The 50-day EMA fell below the 200-day EMA, which some use as an indication of a bear market, but often you get oversold bounced after they first cross.
A longer term chart of the DWCPF shows that this chart exceeded the lows from December 2018 last week, but it closed above those prior lows. That's quite interesting. Waterfall declines like this can experience monster snap back rallies at some point, but it would be very unusual to see a "V" bottom off of this kind of decline. The bottom in December 2018 was one of those rare "V" bottoms after a near 20% decline.
The Volatility Index hit 75 last week - a 12 year high. The late rally on Friday was enough to pull the VIX down to close the open gap from Thursday, but it remained above 55 - the old resistance area.
The AGG (bonds / F-fund) was clobbered last week with a huge move to the downside off the highs from just last Monday. It did manage to rebound quite a bit on Friday and recapture the 200-day EMA. The Fed's bond buying program helped turn this around as they are more concerned about the bond market instability, than the stock market's.
The weekly chart of the AGG shows the tremendous size of last week's bar and we hadn't seen anything like that since 2008 when bonds were putting in a bottom. Is it time for the F-fund again, if you're afraid to buy stocks? Maybe so.
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
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.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
The action has been so out of the ordinary that we have to go back to 2008 to find comparisons in volatility and some indicators extremes, and while the charts and technical analysis may match up to some degree, I would caution over comparing the two from a fundamental standpoint because one was a near collapse of the global financial system, and one is a virus that will likely slow down the economy for a quarter or two.
We had warnings signs for months with commodity prices like oil and copper falling, and yields dropping and the inversion last year, so we saw the possibility of a recession this year. That does not mean we saw what happened coming. Rather than a sluggish market and a modest correction, we got a virus related, all out bear market, manifest in a matter of days.
Because of the sensationalized, "if it bleeds, it leads" 24/7 media coverage of the coronavirus, the stock market will probably start to bounce back a lot sooner than the news might suggest, and that will be to the detriment of the mom and pop investors who may have sold in a panic this month. I'm not sure exactly when that recovery will occur, but one day mom and pop will look at the stock market and say... "how did the market rally back so much already? Should we be buying back in?"
The point is, don't rely on the news to determine when and where to put your money. Keep an eye on the market itself. It will tell you, although the volatility will make it tough to trust for a while.
Last Monday I posted this chart and I said, "we're at least half way down the slope now, and the capitulation / despondency will come after the next rally fails and we test the lows again." Now I'd say we're in panic / capitulation mode and a bounce and retest of the lows could finish the process.
It's easy to say but even knowing that it's coming, the action may be too chaotic for anyone to manage it with any ease at all. It could be days, or maybe weeks. In prior situations it took about two months from a low, a bounce, and another test of low, but this decline was so swift I wouldn't be surprised if everything is hastened - except for the perpetuating fear thing that will probably keep mom and pop from being involved until the market has already turned around. The point is, by the time we get an "all's clear" from the government on the coronavirus, the stock market will have likely shot up already.
Probably not a major fact in this environment, but there is an unusual positive blip on the March seasonality chart for this week. But after that, not so much. It is an options expiration week.
Chart provided courtesy of www.sentimentrader.com
The Fed has an FOMC meeting on this week's schedule and we should see another big interest rate cut on Wednesday, possibly down to 0% (Update: They just did it Sunday evening). They've been doing other things like another bond buying program and basically another round of Quantitative Easing. If they announce more of that I can't see the market ignoring it, but first we have to get by the emotional roller-coaster. It is setting up a monster growth environment, once we can get through the virus chaos.
Buckle up. It's going to be a wild one. The futures hit limit down right away after a weekend of fear mongering news and Fed rate cut to 0%.
The S&P 500 (C-fund) opened sharply higher on Friday, faded and tested Thursday's low, then battled back to close at the highs. It was a very constructive day from a technical analysis standpoint, but we've seen two of these setups fail already in March as the S&P 500 has been trying to put together consecutive winning days for over a month now. Volume was high on Thursday and Friday, similar to the levels we saw at the reversal on February 28th, and it feels like a temporary low, but the news continues to be bad and investors are obviously nervous. Friday's rally filled that large open gap from Thursday.
The weekly chart of the S&P 500 shows that it nearly came down to test the bottom of the 2018 lows before reversing upward and putting a nice positive tail on the weekly candlestick.
This weekly line chart is showing only the end of week closing prices and it's quite interesting where the S&P 500 closed on Friday. That's a 4 year rising trendline.
The DWCPF (S-fund) lagged a bit but the positive reversal was enough to create an "outside" positive reversal day, where the high and lows exceeded Thursday's high and low, and it closed above Thursday's high. The 50-day EMA fell below the 200-day EMA, which some use as an indication of a bear market, but often you get oversold bounced after they first cross.
A longer term chart of the DWCPF shows that this chart exceeded the lows from December 2018 last week, but it closed above those prior lows. That's quite interesting. Waterfall declines like this can experience monster snap back rallies at some point, but it would be very unusual to see a "V" bottom off of this kind of decline. The bottom in December 2018 was one of those rare "V" bottoms after a near 20% decline.
The Volatility Index hit 75 last week - a 12 year high. The late rally on Friday was enough to pull the VIX down to close the open gap from Thursday, but it remained above 55 - the old resistance area.
The AGG (bonds / F-fund) was clobbered last week with a huge move to the downside off the highs from just last Monday. It did manage to rebound quite a bit on Friday and recapture the 200-day EMA. The Fed's bond buying program helped turn this around as they are more concerned about the bond market instability, than the stock market's.
The weekly chart of the AGG shows the tremendous size of last week's bar and we hadn't seen anything like that since 2008 when bonds were putting in a bottom. Is it time for the F-fund again, if you're afraid to buy stocks? Maybe so.
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
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.
