TSP Talk Blog

Federal Reserve Bank of Boston president Eric Rosengren suggested that a September rate hike might still be possible in September and clearly the stock market had a problem with that. Add this to the ECB's decision last week to keep rates at current levels, instead of cutting them, and investors ran scared and we had ourselves a near 400-point decline in the Dow with the losses between 2% and 3% across the board.

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As bad as it was, it was interesting to see on Friday that the safety trades did not get any action either as gold and bonds were down sharply as well. So where are folks going to put their money?

The Fed funds rate right now is 0.25-0.50, so if they move to 0.50-0.75 will that satisfy investors to opt for that kind of return instead of staying in stocks? And note that the hike is being talked about because of signs of strength in the economy that the Fed sees as a green light to finally start to "normalize" rates. Probably not a good reason to sell stocks, but more of an emotional reaction to a market that throws a tantrum when the Fed gets the slightest bit hawkish. If the charts continue to deteriorate I will assume something else is going on.

The sell-off may have also been exaggerated by the weekend's 15th anniversary of 9/11 this weekend.

Taking a look at the seasonality chart for September, and it's interesting to see that for some reason September 9th had such a poor record over the last 30 years. We have a couple more like that coming up but those post-9/11 dates make more sense because of the damage that was done to the indices after 9/11.


Chart provided courtesy of www.sentimentrader.com

On the bright side, the next couple of weeks have a lot more green days than red, but after that... not so good. Seasonality is rarely used as a primary indicator so this is just something to add to the rest of your analysis.

The SPY (S&P 500 / C-Fund) opened sharply lower on Friday creating a good sized gap on the chart near 218. It fell through the 50-day EMA rather easily, which is a bit disturbing. The dip buyers had no interest and that opened the door for the bears to put the pedal to the metal - something they have failed to do for months. Volume was quite high in the SPY which could mean money managers were very much in on the selling, but like the Brexit sell-off, it could have been a capitulation already. We'll find out as the week progresses.




The weekly chart shows the topping formation and if look at it as the inverted head and shoulders pattern that we have been watching, a test of the neckline is not an unhealthy move. A drop below the neckline would be a different situation.




The DWCPF (S-Fund) lost 2.9% falling below the F-flag, the 20-day EMA, and hanging near the 50-day EMA. That's a serious decline and resembles the losses we saw after the Brexit vote.




If we look at a longer-term chart of the DWCPF, it still sticks out very noticeably, but it's not really all that bad yet. But if the downside continues we could be comparing it to the early 2016 correction.




The Dow Transportation Index has been the chart that had been most improved and being a major leading index, we thought this may have been a good sign for the market. The inverted head and shoulders pattern seemed to have broken above the neckline, but that has now failed, and we would be looking for the 200-day EMA to hold if this is to remain bullish.




Even the High Yield Corporate Bonds, which showed no signs of trouble before Friday, fell sharply, but it does remain in an uptrend and above the 50-day EMA. We will see if bargain hunters jump into HYG this week.




The Volatility Index spiked sharply higher, breaking though that 11 - 14 trading channel and right through the 200-day EMA. This is a bit alarming, that panic set in so quickly.




The AGG (Bonds / F-fund) was down, as we might expect when the Fed is talking about raising rates, but they also tend to act as a safety play, and that was not the case. Not the FOMC meeting nor the jobs report had the impact as this statement from Eric Rosengren had. The lower end of the flag is now being tested.




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

Tom Crowley


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