FOMC Tuesday
                         
Stocks got off to a good start on Monday and the rally continued well into the afternoon, but a late afternoon sell-off took the indices well off of their highs.  The Dow did gain 18-points, but the leaders - Transportation Index, Nasdaq and small caps, were all down on the day.

                                  
For the TSP, the C-fund held onto a 0.02% gain on Monday, the S-fund lost 0.36%, the I-fund got help from a weak dollar and gained 1.43%, while the F-fund (bonds) added 0.16%.  

The late selling could have been nerves in front of today's FOMC meeting with the Fed, and the Senate vote on the tax cut extensions, but let's face it, the market needs a rest.  The Nasdaq had been up for 8 consecutive days.  I'm not expecting too much downside if yesterday's reversal day does see some follow-through, but I do have some indicators to show you down below that does spark concern.

S&P 500 closed just slightly positive as it continues to hug that rising middle trend line, which is acting as resistance.  I think a pullback to the breakout area - about 1227 - would be "normal" but we could actually get a move all the way down to the 1200 area and still remain in that strong uptrend.  I still suspect that we could see 1275 before this rally is over, but that doesn't mean we won't see a pull back.

                                                 
                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The dollar did break down from the bear flag that we talked about yesterday, and the 50-day EMA was broken intraday, but it did close above it.  This is an ugly chart and I would expect the dollar to move lower in the coming weeks, and that could be what keeps stocks buoyant.
 
                        
                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Now comes the troubling part.  The SentimenTrader.com Smart Money / Dumb Money Confidence indicator has moved into extreme territory.  The Dumb Money reading is now at 79, a very extended reading that will certainly test the upcoming seasonal strength.

                                
                                 Chart provided courtesy of www.sentimentrader.com

A longer-term look at this data shows just how extreme a 79 is in the dumb money (the red chart below.)  We haven't see it this high since late 2004 (six years.)  Also the -0.45% spread between the smart and dumb money is the largest since the April peak, and prior to that, the peak in mid-2008.


                              Chart provided courtesy of www.sentimentrader.com

There was a higher spread in late 2006 and the market actually rallied for several more weeks before a sharp correction in February 2007, but the market continued higher after that for a couple more months.  So, the odds favor some kind of pullback, but not always, and it also does not necessarily mean the end of the bull market.

Here is what happened after prior spreads of -45%. 

     
                                 Chart provided courtesy of www.sentimentrader.com

Historically, the market's most bullish seasonal period is between about 12/20 and into the first or second week of January.  It does not always work out this way, but over the last two years we saw the mid-December chop, then a rally into January, followed by a correction in January.



                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I will point out that in 2007, the market went down during the week between Christmas and New Years so as always, nothing is a guarantee in this game.

Look for a policy statement from the Fed today at 2:15 PM ET.  It could be a market mover.

Thanks for reading!  We'll see you back here tomorrow.