For the TSP, the C-fund added 0.72%, the S-fund jumped 1.25%, and because the rally came late and the dollar closed higher, the I-fund was actually down 0.35% on Friday.  The  F-fund (bonds) was down 0.07%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-up.  (I just realized this weekend, thanks to a reader, that these blog entries were only viewable to registered message board members.  I have changed that so they can be accessed by anyone.)

I always feel as if the market is trying to fool us and get us to lean the wrong way and although I am trying to make a little money on this upside move, I have been skeptical of this recent oversold bounce.  But, the more I research, the more I am becoming a believer in a rally. 

Yes, the S&P 500 is below the 200-day EMA and the 50-day EMA just moved below the 200-day EMA - a bear market signal, but I will show you what has me intrigued.

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

First, let's look at the market leaders;  The Nasdaq and Dow Transportation Index. 

There is a large open gap on the Nasdaq that has nearly closed, and sometimes upside bounces fill the gap then head back down.  That's a concern.  The index is in an obvious downtrend but there is room above for more upside action within the trading channel, should it choose to go higher.

                         

The Dow Transportation Index is also in a downtrend but you can see that Friday's rally actually pushed it back above the 200-day EMA.  The 50-day EMA is still above the 200-day EMA so technically the Transports are not in a bear market. 

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

The Rydex cash Flow ratio is a good sentiment indicator in that it tells us what people (the dumb money) are actually doing with their money - as opposed to a sentiment survey which just tells us what they are saying they are doing.  Look how low this indicator has gotten since the April highs. 

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

It is lower than any point during the 2007 - 2008 bear market.  Investor are very nervous right now.  And, as you know, when investors become overly bearish, it usually means good things for the stock market. 

So what is the smart money doing?  Well, according to the OEX put/call ratio, always considered the smarter money, they are very bullish.  This indicator is more bullish than it has been in years. 


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

We saw a similarly high reading near the 2009 bear market bottom, but this reading is even higher.

The dollar has been pulling back over the last several weeks, and is now nearing one of the last bullish trend lines created since it bottomed late in 2009.  The 200-day EMA is also there for some support but that is still 2.0 full points below where it closed on Friday. 

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

It is probably due for a bounce, but that may not be bullish for stocks in the short run, so if these run together, we could see continued weakness in the dollar rather than a rebound.

As we mentioned last week, the TSP Talk Sentiment Survey came it at 54% bulls, 37% bears for a bulls to bears ratio of 1.47 to 1.  During the last year - plus, this was a neutral reading, but now that we had the bear market crossover, any ratio of 1 to 1 or higher is considered a sell signal.

                             

This system is not normally an instant gratification indicator so don't expect the market to just rollover because of this signal, but it is telling us that some caution may be warranted over the next week or two.  However, if the market can continue to rally off of its recent lows and the 50-day EMA, which is just 50 cents below the 200-day EMA, can recapture the 200-day EMA, this becomes a neutral reading again, rather than a sell signal.

I realize I am flip flopping a little but it is a very flaky time for the market and I want to be open minded so I don't get too stubborn about one direction.  Everything is so close to switching from bull to bear and we are either being given a great warning for the future, or a great oversold / overly bearish (see Rydex Ratio above) buying opportunity - or both!

I've shown this 2007 chart many times before.  When we saw the drop from point E to point F, we all thought for sure we were entering a new bear market, which turned out to be true.  But first the S&P 500 rallied from 1375 to 1575 (15%) during the two months from point F to point G. 

 

Point G turned out to be the market peak, and as I keep saying, the market will keep trying to get us to lean the wrong way.  So, while our charts and indicators are pointing toward a new bear market, we may get a decent rally before things get really bad. 

Today is the official start to earnings season as Alcoa will be reporting later today.  It is also the 7th trading day in July and you can see in the seasonality chart below that it begins a favorable 3-day period for the S&P historically, but the indices start the weak in overbought territory so the very short-term is a mixed picture.
                      
Thanks for reading.  We'll see you back here tomorrow.

Tom Crowley