TSP Talk Blog

08/08/11

Friday was a mixed day for stocks, but of course the big news came after the close on Friday when Standard & Poor's downgraded the credit / debt rating of the U.S. from AAA to AA+. The futures are sharply lower as we head into Monday's trading.

For the TSP, the C-fund slipped 0.06% on Friday, the S-fund dropped 1.72%, the I-fund gained 0.49%, and the F-fund (bonds) fell 0.54%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.

Last week was a terrible week for stocks and once again the stock market seemed to sniff out the danger before the news was announced. It was like when the indices dropped 10% during the two-weeks prior to the 9/11 tragedy, although in this case we all knew that a downgrade was a real possibility. The market, as a whole, is a lot smarter than the individuals who make it up.

Although the bond market seemed to ignore it, we sort of knew that a downgrade was a possibility, but the less than meaningful debt ceiling deal failed to provide Standard & Poor's a reason to hold off.

The S&P 500 chart is clearly broken as we see the head and shoulders pattern nearly hitting the initial downside target already. Based on the formation, 1120-1150 would be the initial target.


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

Any time the market is trading below the 20, 50, and 200-day EMA's, the defense has to come on the field. That said, look for sharp, volatile action in both directions in the coming days and weeks.

During the 2008 financial crisis bear market, we saw the Dow rally nearly 1000-points in one day, only to see the market head south shortly thereafter. So, selling now is not a bad idea because we are likely going to be entering another bearish period for stocks in the coming months, but being a little patient and waiting for a rally could be a better move.

Looking at a weekly chart of the S&P 500 shows that the long-term bull market support has been broken, as well as the H&S pattern, but we could see a move back up to the neckline of the H&S - even all the back up to the old support line - but they will likely be the new resistance.


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

Not surprisingly, all of the indicators are at extreme oversold and overly bearish conditions, and that could set up some short-term sharp rallies, but the rallies will likely be short-lived and will need to be sold.


Chart provided courtesy of www.sentimentrader.com

Unfortunately it appears that we could be witnessing the formation of an intermediate to long-term market top. It is going to be an emotional ride so I would recommend making yourself a plan to help you with a strategy so that you do not make emotional moves during the volatility. My plan is to sell any big rally this week - hopefully, or with some luck, that will be near 1260; the old neckline of the broken head and shoulders pattern.

The futures are pointing straight down as I write this late Sunday night with the Dow futures being off 260-points. That sounds terrible, but I guess it could be worse. I have no idea how things will play out today. We've never had a U.S.A. downgrade before. I guess I would not be surprised to see a 500-1000 point loss on the day, but it also would not surprise me to see the market reverse and close in positive territory.

We are in uncharted territory and anything could happen in the short run, but if I had to guess at an outcome for this market I would expect wild action in the short-term, including some big rallies, but I think stocks will be in trouble for many weeks or months.

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

Tom Crowley


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