TSP Talk Blog

11/03/11

The market saw a light volume relief rally yesterday on a day marked by the Fed expressing some concerns over the sluggish economic recovery. The Dow gained 178-points.



For the TSP, the C-fund was up 1.61% yesterday, the S-fund gained 2.22%, the I-fund added 0.81%, and the F-fund (bonds) slipped 0.04%.

The S&P 500 closed just above the 200-day EMA again, and has so far found support at the 50-day EMA. Both are positive signs, and we are seeing some positive developments in the charts in the form of rising trading channels, but as I will talk about below, some of the indicators are getting troublesome.


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

I didn't want to put too much in the chart above so I am showing the S&P here again, with what appears to be a bullish inverted head & shoulders pattern - complete with a breakout and a possible successful test of the neckline. Should the neckline hold as support, we could have something here. If it doesn't hold - not good.


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

The Nasdaq has that inverted head and shoulders pattern as well, but it has fallen below the neckline.


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

There is still an open gap on the chart that could get filled this week, but I would really feel better if the Nasdaq climbed back above the 2700 area and the neckline.

Now, here are a couple of indicators that could be a concern. The Rydex Cash Flow Ratio shows that investors have gone from extremely bearish (which was a bullish sign and turned out to be a great buying opportunity) to being quite bullish. Although it it not near the extreme bullish levels, I would be surprised if this indicator continued to move up uninterrupted. Any hiccups in the indicator would probably be triggered by weakness in the market.


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

It is nice to see investors going from cash and bearish funds into bullish funds, but when they all jump in at once like this, the market is likely going to try to prove them wrong and scare them out again.

Another indicator that I really like is the put / call ratios. The smart money tends to move in the opposite direction of the dumb money. The smart money tends to fade the market, meaning if the market is shooting up, the smart money starts to hedge their bets by putting some downside protection in their accounts. The dumb money does the opposite. They get more and more aggressive when the market is going up, and more defensive when it goes down.


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

As you can see, the smart money was most bullish at the early October lows, and now that we have seen a big rally, they are as bearish as they were near this year's highs.

There is one thing I did notice and it could have something to do with the end of the year. (Warning! Complete speculation on my part coming up!) This indicator ended the last two years near its low and the market continued to go up for weeks to months afterward. Perhaps it is just the smart money adding protection as we head into the strongest three-months of the year historically. Just a guess.

I see the futures are down sharply as I write this (Wednesday night @ 10:15 PM ET) and it could be because the referendum on the Greek bailout has been scheduled for a vote in early December. That means we have another month of uncertainty to deal with. The big rally last week was based on belief that the bailout was a done deal. Now we are back to not knowing.

We get the October jobs report tomorrow so the volatility is bound to continue.

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

Tom Crowley


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