Breaking down, but due for a rebound

Stocks were rocked again on Friday after the announcement of the May jobs report, which many expected to be bad, was even worse than expected.  The Dow was down about 140-points at the open on Friday, nearly came back to break-even, but closed down 97. 

         
For the TSP, the C-fund gave up 0.97% on Friday, the S-fund lost 1.34%, the I-fund added 0.20% partially because of the dollar falling, and the F-fund (bonds) gained 0.13%. 

I have some reasons to believe that we could see a relief rally in the short-term, but I am running out of excuses for this market.  We have had warning after warning after the S&P 500 fell below the 20 and 50-day EMA's, two important support lines, and is now in a clear downtrend. 
                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

RevShark pointed out in this week's report, that small caps have formed a bearish head and shoulders pattern and it is staring at a precipitous edge with little support below.  The Russell 2000 does have an open gap down below 800.

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

While everything looks bad, we do tend to see relief rallies when sentiment and economic data are as bad as we are currently seeing.  This Citigroup Economic Surprise Index below shows how negative the economic reports have been.  The negative surprises put this index down to negative 90%, and generally when we see readings this low, a relief rally is close at hand.
                         
       
                      Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk

The TSP Talk Sentiment Survey came in at 31% bulls, 56% bears, for a bulls to bears ratio of 0.55 to 1. That is a fresh buy signal reading so the system's allocation remains 100% S-Fund for this week.  The system is up 6.17% for 2011.

The AAII Investor Sentiment Survey agrees with our finds as it came in at 30% bulls and 33% bears for a 0.91 to 1 ratio.  Anything below 1 to 1 tends to be bullish.

This is another survey I keep an eye on, the Investors Intelligence Survey, and surprisingly it is in another world.  For some reason these investors are very bullish with 45% bulls and 20% bears for a 2.22 to 1 bulls to bears ratio, which is a bearish sign for the market.  Go figure.
                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Bottom line, the chart looks bad.  We are seeing reasons to believe a short-term rally is coming, but the S&P 500 must recapture the 50-day EMA or I am going to have to head into defensive mode again.  If you recall, I had stayed bullish while most of our premium services moved into a more safe allocation.  Not surprisingly, I was wrong.

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