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| Today's Commentary | |
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False breakout or news driven
action? Stocks open up sharply on Tuesday after the details of the proposed tax cut compromise were revealed, but things went sour after the news that the SEC may widen its probe against insider trading, which also happened to be at the same time as Obama's afternoon press conference explaining the tax compromise. By the close the Dow, which had been up 90-points earlier, was down 3-points on the day. The S&P 500, Nasdaq, Dow Transports, and in particular the small caps of the Russell 2000, all closed in positive territory, but reversal patterns were all over the charts.  For the TSP, the C-fund added 0.05% on Tuesday, the S-fund was up 0.18%, the I-fund gained 0.28%, while the F-fund (bonds) fell 0.83% as yields soared. The S&P 500 put in a classic reversal, or "swing" day, which usually precedes a change in direction for the index. If there is an "it's different this time" about this move, it was that the strong open was news driven, and the late sell-off was news driven. But the fact that sellers stepped up and dip buyers did not come in late is a concern. The question is, will the dip buyers step up today, or will profit takers get momentum on the sell side?  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk The proposed tax cut extension actually gives removes the big reason to take profits this December as the capital gains tax may not be rising in 2011 - as could be the case if the tax cuts are not extended. If we do not get the tax cut extension, investors would have to make a decision on whether to sell their positions and pay taxes in 2010, or wait and pay a higher capital gains tax later. It would have put pressure on the stock market in the last few weeks of trading. That was why we saw the strong open, but the late SEC news apparently spooked some on Wall Street. The market leader Dow Transportation Index, also put in a reversal day after hitting what looks to be the top of a new short-term ascending trading channel. There is certainly room for the index to move lower as the next support levels are just below 5000, but that's just 1% or 2% loss from where it closed yesterday.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk Have you seen bond yields lately? The yield on the 10-year T-note has gone from about 2.3% to 3.2% in less than two months. When yields go up, bond prices and the F-fund go down.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk That's a pretty big move and why we are seeing the weakness in the F-fund. Bonds are still in a longer-term bull market but we are seeing them rollover. The 200-day EMA below could be the next target, but whether or not the bull market in bonds turn into a bear market won't be determined until we see the outcome of this EMA test.  Charts provided courtesy of www.decisionpoint.com, analysis by TSP Talk This would seem to be a good sign for the stock market because when yields move up, it can be an indication of an improvement in the economy. The extension of the tax cuts would be a positive for the economy, and that's why we saw yields move up sharply yesterday, and bond prices (F-fund) go down. With the negative reversal / swing day in stocks yesterday, we might expect the downside to continue today. I do have a theory that the news driven open and close could negate the typical reversal day action, but the stock indices may need a rest after the recent rally so neither way would surprise me. Having used my December IFT's to buy last week, I am reluctant to sell in an attempt to miss a pullback. Selling now would leave me on the sidelines with no IFT's to buy again during one of the strongest seasonal periods of the year between 12/20 and early January, when we get our next batch of transfers. Short of a technical breakdown, I will likely ride out any pullback. Thanks for reading! We'll see you back here tomorrow.
Tom Crowley |
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