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Big gains disappear late

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After a thunderous open which had the Dow up over 400-points during morning trading and well over 300 as late as 3 PM ET, the bears stepped in before the close and took the indices deep into the red again. The Dow ended the day down 205-points.

Daily TSP Funds Return

The C-fund lagged, and because of late sell off in the U.S. and the weak dollar, the I-fund had a big day. That may not last long. Bonds were down sharply.

According to Sentimentrader.com there has only been one other time when the S&P500 has completely lost an intraday gain of more than 3% - October 16, 2008.

The bleeding hasn't stopped and the streak of losses has become quite impressive (in a bad way), but you never know when this will turnaround and snap-back rallies can be explosive as we got a taste of on Tuesday morning. Unfortunately that one didn't last. The question becomes, do you sell the rallies. The answer on Tuesday would have been yes, although that wouldn't have helped us in the TSP with our end of day prices. We will eventually get a big rebound and it's always good to have a plan in place when it happens, otherwise emotions will likely take over your decision making process. We'll take a look below at some of the prior breakdowns and what happened then.


The SPY (S&P 500 / C-fund) posted an inside day where the low was higher than Monday's low, and the high was lower than Monday's high. It could be in the process of consolidating around the lows, and a test of Monday's low is not out of the question. In fact it happens often. The problem with trying to time that with your TSP account is that the low could be tested during morning trading and we could see a 500-1000 point rally in the afternoon. That may have sounded absurd a couple of weeks ago, but does anybody doubt that kind of action is possible now?


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


Here is a 9-year chart of the S&P 500 which shows previous breakdowns from the 50-week EMA. Most have been brief but in early 2008 it broke down sharply, rallied all the way back several months later, and then collapsed again. Horrible action but very good opportunities if you can time it, which is tougher than it sounds.


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


If I had to bet I'd say we're looking more toward a market like in 2011 where it broke down and the lows were tested several times before bottoming. This isn't a financial crisis like 2008... yet. I have an idea, but exactly what it is that is going on, I don't know. There's a lot going on right now and it could be a combination of many events.

Here's the chart of the 2011 breakdown. The initial decline bottomed in early August and we saw several rallies and sell-offs in a wide range. It's very tough to trade with our limits and deadlines, but it's not out of the question. If we do end up in a similar situation, we don't want to get sucked into every rally and think the bottom is in. This 2011 consolidation lasted about 2 months before the final low was made.


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


The Dow Completion Index (S-Fund) has fallen off of a table and unlike the S&P, it actually made a lower low yesterday, closing at a new low. The small caps (Russell 2000 futures) were up nearly 5% in pre-market trading but once the market opened, things went south in a hurry.


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


The intermediate-term indicators are moving vertically lower and have now gone below the -100 level, which is extremely oversold.


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


The
AGG (bonds / F-fund) was down despite the decline in stocks, but we should remember that the bond market closes an hour before the stock market, which about when stocks start to collapse on Tuesday.


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



Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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

Tom Crowley


Posted daily at www.tsptalk.com/comments.php

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