TSP Talk Blog

11/02/11

Stocks fell sharply yesterday as the once certain Greek bailout became questionable again after the Greek prime minister decided to bring it to a vote in his country before agreeing to the bailout. The Dow lost 297-points.



For the TSP, the C-fund lost 2.79% yesterday, the S-fund fell 3.28%, the I-fund dropped 2.93%, and the F-fund (bonds) gained 0.52%.

The fact that all of the gains we saw after the Greek bailout was rumored and announced last Wednesday and Thursday is a concern, and I don't like the severity of this week's drop, nor do I like the fact that the S&P 500 is back below the 200-day EMA, but we did expect a pullback from the near parabolic rise in October and so far the charts are still holding up.

The S&P is bringing the bear flag back in play, although because of how long the flag portion of the flag pattern is, it may just be a rising trading channel with a temporary breakdown in late September.


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

I noticed that after the sharp July / August sell-off (the flag pole of the bear flag), despite being in a bear market, the sell-offs only lasted 3 or 4 days before a we got sharp rally. I'll show it on a chart of the Dow below, although it is true on all of the major indices.


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

Will it be different this time, or will this recent 2 - 3 day decline mark the end of this pullback?

The sell-off opened up another large gap on the Nasdaq yesterday, after filling last week's open gap. It is now just below the 200-day EMA, but still above the 50-day EMA.


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

After a 2-day, nearly 600-point decline in the Dow, panic levels increased and we saw that with a tick up in volume. We also saw a sharp increase in the volatility index with a 22% rise in the VIX on Monday, and a16% jump on Tuesday.

Seeing two consecutive days of at least a 15% increase has only happened 6 times since the VIX was created. Each time the market was up the following day, and as you can see, the next week to three months has a tendency to do much better than a random period.


Chart provided courtesy of www.sentimentrader.com

With only 6 prior instances, sentimenTrader.com loosened the requirements to two consecutive 10% increases in the VIX...


Chart provided courtesy of www.sentimentrader.com

...And the results were still more often positive going forward, when compared to random days.

Is it different this time? Greece's government is on the verge of imploding (possibly as soon as today) and we have a Super Committee trying to determine the fate of our country's credit / debt situation, but so far they are failing to agree on anything despite this month's deadline. So perhaps IT IS different this time and the historically positive data won't work this time around. I guess all we can do is wait and see.

For the record, I did make a partial buy yesterday in my TSP account and will probably go 100% stock funds some time this week.

The Fed's FOMC policy statement will be announced today and after the recent action in the market, you never know what the Fed may pull out of its hat.

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

Tom Crowley


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