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Negative Seasonality ends, so now what?

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Stocks continued their slide on Friday as the Dow gave up another 163-points. Seasonality and a post-earnings "sell the news" reaction seems to be the culprit, and the S&P 500, which hit a new high on Monday last week, is now down 2.5% from those highs. Not alarming, but the volatility may be causing some concerns.

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The S-fund continues to lag, and as you will see below, it is testing some important support. Bonds were flat.

If any of you were around in 2008 you remember the carnage the indices experienced back then - the C-fund lost 37% that year, and yet it outperformed the S and I-funds. We've gotten a little spoiled since the 2009 lows and we should put things a little more in perspective.

A 2.5% decline is nothing to be overly concerned about, but yes a 37% decline has to start with a 2.5% loss. Since 2009 there have only been a few serious pullbacks, and instead of being worried, it turned out that each one of them, as well as each smaller pullback like the one we're in now, has led to new highs.

If the charts start to break down, then it's another story. The Transportation Index broke a couple of months ago and so far that hasn't leaked into the other indices, but now we're seeing the small caps flirting with the 200-day EMA so our antennae may be picking up some problems, although it's a little premature to think that this is anything but just another good buying opportunity for those with cash.

The SPY (S&P500 / C-fund) did fill that large open gap on Friday, and I guess that shouldn't be a surprise. Gaps get filled. The bulls now are hoping that this mission accomplished gap fill will be the end of the pullback. The problem with the gap fill is that now the S&P is back below the 50-day EMA. Normally that is a warning sign but you can see on this chart that the 50 EMA was broken several times and each one was temporary. The prior one was a bigger scare as it lasted 9 days while the other were less than 5 days.


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


The weekly chart of the S&P 500 is still in good shape but I'm not sure I like the negative outside reversal weekly bar.


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


The Dow Completion Index (S-fund) filled its open gap last week, but its inability to reach new highs like the S&P, and its second test of the 200-day EMA this month makes it a little more vulnerable.


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


The
longer-term chart of the Dow Completion Index (S-fund) shows that, except for in October 2014, the 200-day EMA has held over and over. But when it does break... uh, oh... see October.


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


The Nasdaq 100 had been one of the best performing indices for the market as large tech stocks have been doing very well. But some disappointing earnings from companies that may have been priced for perfection, shook things up last week. The problem with this index was that fewer and fewer stocks in the index and the Nasdaq Composite, were making new highs like the big guys, meaning the index was being held up by just the big dogs, and that's not always sustainable. This is not comparing the current market to the dot com bubble, but that's what happened back then - 2000 - 2001, when that bubble burst.



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

The
EFA (EAFE index / I-fund) fell to the 200-day EMA on Friday and that didn't close the large gap below it. Because of the overnight trading, this chart sees a lot more gaps created and while most of them do get filled, I don't treat the gaps here like I would on the SPY.


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

China's Shanghai Index has continued to bounce back since the early July low. It has broken above the steep descending trading channel but is now testing the 50-day EMA.


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


Today is trading day #18 in July so the historical seasonality finally picks up as that sluggish stretch ends. Perhaps an oversold rally will fulfill the end of July strength, but unfortunately, the strong seasonality ends there.



The August seasonality chart starts out week and doesn't pick up until the third week of the month.


The AGG (bonds / F-fund) briefly broke above the descending resistance line mentioned last week, but closed just below it. The question is, will the break of the 50 and 200-day EMA's be temporary like the one we saw earlier this month, or are bonds ready to make another attempt at a rally? It depend on if stocks are able to rally. If they do, money will likely leave bonds for stocks - but that's a big if.


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



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

Tom Crowley


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S&P500 (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

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