TSP Talk Blog

09/02/11

Stocks bounced around after the open on Thursday, but saw a sharp spike higher after a weak, but better than expected, ISM report. It looks like investors wanted to light up before today's employment report and the long holiday weekend.



For the TSP, the C-fund was down 1.18% yesterday, the S-fund dropped 1.90%, the I-fund lost 0.13%, and the F-fund (bonds) gained 0.33%.

The S&P 500 made a slightly lower high and lower low yesterday, compared to Wednesday, and so far it is finding resistance at the 50-day EMA and the upper end of the rising flag portion of the bear flag.


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

I used to use the 10-day moving average of the ARMS Index very often while looking for turning points in the market, but for the last few years it hasn't been a very helpful indicator. But taking a look at the indicator over the last year, we do see a pattern of readings of 1.0 proving to be at or near short-term market peaks, and readings below 1.50 good places to consider buying. It is now above that 1.0 level (above on the chart, less in number.)


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

Despite the recent 8% rally off of the lows, we are surprisingly not seeing investors getting very bullish (and that is actually a bullish sign for stocks.) Our readers have remained quite bearish despite the big rally, and could be because of the selling yesterday, possibly because of my recent short-term bearish outlook in these commentary, and the timing of the TSP Talk Sentiment Survey being taken on a down day. The bulls (39%) to bears (50%) ratio in our survey was 0.78 to 1 which keeps the system on a buy signal for next week. I can't help wonder what the results would have been if the survey was taken on Wednesday instead of Thursday.

The Investor Intelligence bullish percentage also dropped despite the recent rally. Here is what sentimenTrader.com had to say about that:

According to Investor's Intelligence, newsletter writers became a little bit more bearish last week despite a large rally in stocks. I don't want to make too much out of this - it's only one week, after all - but it's an unusual occurrence so we should at least look at it. There have been a few other times since 1969 that something similar occurred. What we're looking for is any other time the S&P rallied at least +4% during a week, but the sentiment survey lost at least 2% in the Bull Ratio, and was lower than 55%. Chart provided courtesy of www.sentimentrader.com Shorter-term results seemed to suggest that the newsletters were justified in showing some caution. Several times, the market fell heavily in the weeks following these readings. Longer-term (more than three months), it was a different story. A few of them were close to major market lows, and all but one showed positive returns from 3 months to 1 year forward. A year later, in fact, 5 of the 7 showed returns greater than +20%. I wouldn't take this as a buy signal necessarily, but again it's unusual and we received some questions about it, so it was worth a look.

This goes along with my theory that we could see short-term (weeks) weakness in the market with a possible test of the lows this fall, but if and when those lows are hit, it will probably be a good buying opportunity going into the last quarter of 2011.

Today we get the jobs report and the latest estimates are for a gain of 70,000 jobs with an unemployment rate of 9.1%

Thanks for reading! Have a great holiday weekend!

Tom Crowley


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