TSP Talk Blog

Well, we just experienced the worst 4-day start for stocks to a New Year - ever! That's right, the Dow and S&P 500 have never been down this much after the 1st 4 trading days of a new year. Who knows how the year will end, but these slow starts tend to set the tone for the year. If that's the case, then we can expect volatility to be elevated this year. That could mean trouble... for stocks, but it's good opportunities for market timers who are on the right side of the trades.

The "buy and holder's" fate is in the hands of the indices, and some of them will be diversified so they may not do as bad as stocks do, but of course they don't do as well as the indices during good years. Our job is to try to figure this game out, and make the best trades we can based on the information we have. Easier said than done. If you got caught in this downdraft, I wouldn't worry too much. There will be plenty of opportunities this year.

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The Dow lost 392-points and the culprits are China and oil - again. For a second day this week the Chinese Shanghai Index closed down early because it hit the 7% maximum loss. We have similar "circuit breakers" that are triggered at 7%, 13% and 20% depending on the time of day it occurs. The 20% level is the one that shuts the market down for the day. The 7% and 13% levels just halt trading for 15 minutes. Not that we are going to see anything like this happening, but that's why China's market has been closing early this week. The closures may be back-firing on China because it is triggering margin calls and forced liquidations to some managed funds.

If we didn't have enough volatility already, we get the December jobs report and estimates are looking for a gain of 200,000 jobs, and an unemployment rate of 5.0%. The Jobs Report Contest winner will be announced here.

The futures just turn up nicely as I write this Thursday evening as the Shanghai was set to open up over 2%, but that's nothing over there and could reverse in the blink of an eye. Looks like it's going to be a wild night Thursday and wild open on Friday after the jobs report.

The SPY (S&P 500 / C-Fund) finally filled that open gap (blue) from early October. Now the only open gap is overhead near 204. The bull flag I have been watching turned out to be a bust and now we have official new lower highs and lower lows that are not part of a bull flag. An oversold rally is probably on the horizon but look at the trading volume. We'd like to see a high volume capitulation-like sell-off like we saw in August. If we don't get the volume then we may see the rallies being sold until we see more bulls give up.


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

The Dow Completion Index (small caps / S-Fund) has been in a bear market for months now, and it is certainly acting like it. But as we saw several times, snap back rallies can be big when they occur. Knowing when exactly they will occur is the tough part.


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

The Dow Transportation Index has also been in a bear market for many months and look at what is happening now. This is supposed to be the market leader so this can't be too encouraging. Again, oversold relief rallies are likely at some point.


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

The EFA (EAFE Index / I-fund) is testing the September lows. Is this a double bottom or just flimsy support? That open gap from October has been filled (blue) but look at all the open gaps in red overhead. Thos are nice relief rally targets.


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

The price of oil was down again yesterday (yawn) but it did close off the lows giving a possible reversal day. Clearly this is a bad chart and not bullish at all, but there is room for a short-term relief rally.


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

I thought it was interesting that the High Yield Bond funds didn't get hit nearly as badly as stocks this week. That's a possible good sign.


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

The AGG (Bonds / F-Fund) had a wild day but finished fairly flat. The F-fund did add 0.08%.


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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