TSP Talk Blog

09/12/11

Stocks sold off sharply on Friday as the Dow shed over 300-points on the day. The charts are rolling over again and a test of the lows seems inevitable... and imminent.

For the TSP, the C-fund lost 2.66% on Friday, the S-fund fell 2.80%, the I-fund dropped 3.15%, and the F-fund (bonds) gained 0.24%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.

We have been watching this ominous bear flag for a while now and unless the overnight stock futures reverse upward (they are down about 1% as I write this on Sunday evening), we should see a break below the lower end of the flag.


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

There is support near the 1120 area, which are the August closing lows, and of course there is a big target on 1120 as it would be a test of the actual lows.

If that isn't enough bad news, the typical target for a breakdown of a bear flag is the length of the flag pole, minus the width of the flag. That would give us a target of about 980. That is certainly not written in stone, but it is something to keep in mind.

The Nasdaq is in the same situation as the S&P 500, but I posted the chart below to show how reliable those gap formations can be.

In the last 3 to 4 weeks we have seen four decent sized open gaps created on the chart of the Nasdaq. Every one of them has been filled, and they were filled rather quickly.


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

This doesn't help tell us too much about the intermediate to longer term direction of the market, but if you are ever looking for a place to get in or out of the stock funds and there is an open gap on the chart, you can feel fairly confident that the market will move in the direction of the open gap sooner rather than later, and that might help you make your decision.

The NYSE overbought / oversold indicator is down to -531 which, in a bull market, can be considered very oversold, but in a bear market it is just moderately oversold. In a bear market we can easily see readings of -1000 or even -1500 before the market gives us a rally.


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

With stocks falling, it is not a surprise to see investors moving to bonds. As bond prices (and the F-fund) move up, bond yields will move down. On Friday the yield on the 10-year T-note hit another new low and closed at 1.915%.


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

This may be indicating that the bond market is not expecting another round of Quantitative Easing (QE3) from the Fed, but it's all very confusing to me so it is not easy to explain in a way that might make sense. I'm sure someone else can do a better job, but this how it is wrapped around my head right now:

QE3 would mean putting more money in the system. That would normally weaken the dollar and put inflationary pressure on the economy. The remedy for inflation is usually raising interest rates, which tends to strengthen the dollar, yet we are seeing all-time lows on yields and at the same time we are seeing a recent surge in the dollar.


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

Of course the dollar is strengthening vs. the currencies of the weaker economies around the globe, specifically the Euro.

As I said, it's all very confusing, yet fascinating at the same time, to watch this play out. I think we are seeing things that only happen every few decades. I will do some reading up on this to see if I can find out if there is any rhyme or reason to what we are seeing. Perhaps it is just irrational markets (bonds, currencies, stocks, etc.) reacting to very rare circumstances.

The TSP Talk Sentiment Survey came in at 43% bulls, 47% bears for a 0.91 to 1 bulls to bears ratio which is neutral and keeps the system in a 100% C-fund allocation for this week.

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

Tom Crowley

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