|
| Today's Commentary (Short Term Outlook) |
|
Reversal? It may be temporary, but the market did a classic reversal on Friday and that "could" spark a short-term rally, provided the news stays benign. The Dow closed up 10-points, but it was down 160-points as late as 2 PM ET on Friday afternoon, before bouncing off of the 200-day EMA.  For the TSP stock funds, the C-fund was up 0.29% on the day, the S-fund gained 0.34%, and the I-fund actually dropped 1.47% as the international funds could not keep up with the late rally in U.S. stocks, and the late decline in the U.S. dollar on Friday, but it should carry over to help the I-fund today. For more on the weekly returns, see the TSP Weekly Wrap-up. The S&P 500 is giving us a mixed bag of options as we have some positive signs, and some negative. The first noticeable positive sign was the reversal made off of the 200-day EMA. This late rally / reversal could trigger a short-term continuation rally simply because the momentum has changed. By today's close however, who knows what investors will be doing? Another positive is the positive divergence in the MACD indicator. While the index made a lower low, the MACD did not confirm that move and, like we saw in July, could be a sign that the worst is behind us.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk Now for the bad news. Yes, we had that great reversal at the 200-day EMA, but Friday's low gave us a pretty clean new short-term downtrend to deal with. The longer-term trend remains up since we have not had a lower low yet, and we are still officially in a bull market since the S&P still trades above the 200-day EMA and the 50-day EMA is above the 200-day EMA, but there is new resistance overhead in this new descending channel (see below), to go along with the resistance we could see from the overhead 20 and 50-day EMA's near 1100. (see EMA's above)  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk The small caps of the Russell 2000 also reversed nicely, closing higher Friday and had clean support at the 200-day EMA. This is not "the" S-fund but the Russell is the benchmark for small cap stocks.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk A few more observations, although I am reluctant to interpret them too much because if this current bull market is going to turn into a bear, these extreme readings I am showing will not be quite as extreme. They are only extreme in bull markets... The put / call ratios are showing us that the "dumb money" continues to get more and more defensive while the smart money is coming off their overly bearish position.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk The NYSE overbought / oversold indicator is oversold, but off of the lower reading we saw at last Friday's market low. That divergence could be a positive sign as sometimes when the market experiences a lower low, but the NYSE does not become more oversold, there is a tendency for a rally to follow.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk All good signs, but again, these are good signs in a bull market, not necessarily when a bull market is turning into a bear market so we don't have the answers just yet. We could get a rally off of what we are seeing, but there is some reason to believe that any rally will be short-lived. If the market moves up early this week, I will really want to see it hold and not roll back over in two or three days. After a big reversal day like we had on Friday, it is common to see a gap up opening the next trading day, but as I write this on Sunday night, the futures are not indicating anything like that as they are relatively flat. Perhaps traders are still at their Super Bowl parties. Here's a repeat of last week's sentiment survey results... The TSP Talk Sentiment Survey came in at: bulls 36%, bears 54% for 0.67 to 1 ratio. The last time we saw a ratio this low was the week of July 13, 2009. The market rallied 7% during that week. The last two times we saw ratios in the 0.70's: Nov 2, 2009: +3.20% Oct 5, 2009: +4.51% The bad news is, before that we saw very low ratios throughout the bear market that did little to help the market. So, if we are starting a new bear market, this may not be a buy signal. But if this bull market still has anything left, we should see a decent bounce soon. Thanks for reading. We'll see you back here tomorrow. Tom Crowley |