TSP Talk Blog

Stocks saw an early decline on Friday after Thursday's moderate pullback, but it didn't take long for the bulls to show up again and slowly push stocks back to positive territory by the close. The Dow ended the day up 3-points and it was a positive week for stocks thanks to the 300-point post-Trump speech rally on Wednesday.

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The decline on Thursday did produce an interesting break in a trend of "good" closes for the S&P 500. By that I mean closes that were well off the intraday lows. On Thursday stocks closed at the lows of the day and it had been six weeks since that had happened last. According to sentimenTrader.com, when that has happened in the past, "Over the next one and two months, the S&P managed to rally more than +3% at its best point only once (2006). But it fell more than - 3% at its worst point four times. The overall risk/reward ratio was skewed heavily to the downside. Granted, 1987 has a lot to do with that, but even excluding that crash, the risk/reward was negative up to three months later. When extreme momentum ends, it's extremely rare to see stocks simply resume the uptrend with few interruptions."

The SPY (S&P 500 / C-fund) saw a huge rally on Wednesday last week, a modest pullback on Thursday, then an intraday dip on Friday that closed strong and ended with a slight gain. The open gap from Wednesday is still not quite filled but the shorter-term rising trading channel did hold as support.




The weekly chart shows the extraordinary action to the upside which is an outlier to normal market rallies, and that can happen. However, these extreme breaks from channels more often occur during bear markets when panic kicks in, and here we seem to have a panic from those who have a fear of missing out on the rally.




But like a bear market crash or capitulation, it is likely that things will resort to the norm again. In 2007 and 2008 stocks were falling in an orderly decline before the late summer when the downside action was accelerated. It took a few months but the downside was finally exhausted and things returned back to more "normal." The S&P returned back into the channel, and shortly afterward the bear market channel was broken on the upside.



The point is, these outliers can last longer than seems reasonable, but eventually things return to the norm.


The DWCPF (S-fund) has been choppy since breaking out last month. It remains above some key support which could be the make or break line for the small caps.




The EFA (I-fund) fell below some key support, bounced back above if for a day, then fell back below it. The support has been broke but it is rising so it is still near new highs despite the break in support.




The AGG (bonds / F-fund) posted a positive reversal day on Friday and while it is now up against some possible resistance, there is that large open gap above the resistance that could be an upside target.




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

Tom Crowley
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