TSP Talk Blog

3/05/12

Stocks were down most of the day on Friday, but an afternoon rally took the indices well off of their lows. The Dow lost just 3-points, but the Nasdaq, S&P 500, and the Transportation Index each saw more of a decline.


For the TSP, the C-fund was down 0.32% on Friday, the S-fund fell 1.06%, the I-fund dropped 0.58%, and the F-fund (bonds) gained 0.24%.

For the weekly and monthly TSP returns, please see our recent TSP Weekly Wrap-Up.

The S&P 500 moved down to once again test the bottom of the rising trading channel. I didn't think it was possible, but the trading channel seems to be getting even more narrow and is starting to resemble a bearish rising wedge pattern. Having that happen while struggling to breakout, and hold above the 2011 highs, does not look like a great sign for the short-term.


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

As bullish as the above chart looks - despite being in great need of a pullback - I can see how the 2007 pattern might play out in the coming months. Unfortunately the 2007 pattern turned into a very ugly 2008. Nothing ever repeats exactly, but lets take a look at 2007 - 2008 for some possible clues.

In the blue box below, which represents the period between February and early April 2007, the market pulled back, chopped around, and eventually bottomed. This is similar to what we saw this past November - December (see above blue box).

Then there was about a 3-month rally off of the March 2007 low, which is marked in dark red below - similar to the rally we are currently in which started at the November / December 2011 low.


Chart provided courtesy of www.sentimentrader.com

Should the pattern continue, we would probably be about to enter several weeks of choppy sideways action. See black rectangle above.

The bright red box above represents a breakdown from the sideways action, but the strength of the bull market bring buyers in again. By the end of that period, the bulls are able to test and actually make a slightly higher high.

By then, the bulls are exhausted and the market entered the purple box, which was the beginning of the bear market.

I'm certain it won't play out exactly like this, but with the current national debt finding no relief, I don't see how things will turn out well down the road. We could see some choppy volatile action as we pullback and test the highs a few times in the coming months, but I think in a year or two we could be in for some trouble. I will still play the chart as is. In other words, even though I believed this scenario could happen, I still want to be a buyer of pullbacks and test of support until the technical picture actually deteriorates, and as I said that could be weeks or months away.

A quick look at the Rydex Asset Ratio, which is a measure of what investors are doing with their money, shows that they are as bullish as they have been in the last few years.


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

That is a bearish sign for stocks in the short-term as each time we saw a reading close to being this bullish, we were near a short-term market peak.

The TSP Talk Sentiment Survey came in at 54% bulls, 36% bears, for a bulls to bears ratio of 1.50 to 1. That is a neutral reading in a bull market which means the system will remain 100% S Fund next week.

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

Administrative Note: RevShark is offering 2 weeks of free access to his TSP Timing Newsletter and Daily Afternoon Commentary from March 1 thru March 14. Please click here for more information.

Tom Crowley


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