TSP Talk Blog

12/05/12

Stocks continue to look for direction as the Dow floated between gains and losses all day and closed slightly lower losing 13-points on the day.

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The fiscal cliff negotiations are going nowhere fast, and on the surface it seems like a long-shot that a deal can actually be made before the end of the year. What is actually going on behind closed doors, we don't know. We can only hope it is better than what we're being shown.

Obama says there will be no deal without an increase in tax rates on the wealthy, and the republicans saying they will not agree to those tax rate hikes without substantial spending cuts. The republicans also prefer raising revenues by limiting tax loopholes and deductions rather than increasing any tax rates, and Obama says revenue increases must come by way of rate hikes on the top 2% earners. The question is, are either or both parties willing to go over the fiscal cliff for the sake of their politics? Of course we will pay the price.

The S&P 500 broke below the rising wedge and the 50-day EMA yesterday. It is still in the neighborhood, but we have a new flat top and while it was able to break to the upside of the last flat top, it may be too much to ask to see it happen again.


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

The rising wedge on the Nasdaq also broke down yesterday. It fell below the 50-day EMA intraday, but it did manage to close above it.


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

The Dow is looking "toppy" as it struggles to get above the 50-day EMA. Now it is testing the 20-day and the 200-day EMA. At first glance this doesn't look too promising, but a big rally here off of the 200-day EMA and above the 50-day EMA would turn the negatives into a much better looking chart.


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

For entertainment purposes, let's take another look at the comparison between today's action and that of last spring.


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

Of course this is not a day by day comparison, but the reason the market does produce repeating patterns is because people behave similarly under similar circumstances.

Like the June low, the recent low was met with a sharp rally, followed by a few days of sideways action, then another move higher. That brings us to the area where investors were spooked into another 2 or 3 days of selling (red circle). In June this probably led to some negative sentiment.

I took a look at our sentiment survey's two-week results from mid-to-late June and the bulls to bears ratio was 0.63 to 1 with only 34% being bullish on the June 14 survey. On June 21 it was 0.49 to 1 with only 29% being bullish. That triggered a sharp rally, albeit very short because 3 days later the S&P was pulling back again.

So there is reason to believe the market could be choppy over the next few weeks with strong positive seasonality facing of against the fiscal cliff. How much risk we are willing to take in a volatile market depends on our own tolerance for risk. Sitting aside isn't a bad plan, but if we can buy weakness and sell strength effectively during a choppy market, you can do pretty well. Easier said than done.

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

Tom Crowley


Posted daily at TSP Talk Market Commentary

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