TSP Talk Blog

Believe it or not, stocks opened higher on Tuesday but it turned out to be a Turnaround Tuesday and stocks spent most of the day heading south after the open. The financial stocks, which led the way higher during the Trump rally, led the way on the downside yesterday and that's impacting both the large and small cap indices. The Dow ended the day with a loss of 238-points while small caps took an even bigger loss percentage-wise. The dollar was down sharply helping take some of the blow away from the international fund.

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The dip buyers were nowhere to be found yesterday, so the bears took control. There seems to be a combination of catalysts, but investors may be sensing that what propelled the market higher since last November's Election, is now running into a roadblock in Washington. The republicans can't agree on a replacement for Obamacare so that's bogging things down right now, and of course the democrats are doing everything they can to step on President's Trump agenda and the proposed policies that the market used to rally over the last several months.

The hold up with the healthcare bill is taking up time and pushing the tax reform negotiations down the priority list. Lowering corporate taxes and the repatriation holiday to bring back foreign cash holdings are all on the back-burner now because of the gridlock and obstruction. The result is investors decided to start locking in profits in case nothing gets done in the near future.

A 1% pullback is historically very common but we just haven't seen one in a long time so it felt like the sky was falling yesterday. As we've said before, because the Dow is now over 20,000, it takes a loss of more than 200-points to get a 1% pullback. On average the market experiences a 10% pullback about once a year, but they too have been rare in recent years. It would take a decline of over 2100-points in the Dow to get a 10% pullback off the recent highs. I don't know if that is in the cards this time, but let's put things in perspective by looking at the percentage gains and losses, rather than the more emotional point declines, because points are relative.

The thing to look for now is if the new healthcare bill passes in the House of Representatives on Thursday. That could actually put investors back on the optimistic side, despite more potential obstacles.

Bond yields are falling again (bond prices rising) but exactly how low can they go if the Fed is raising the fed Funds Rate? So, it may just be a relief rally in bonds, which would make sense, but given the technical picture with the large open gap on the bond fund chart and the 200-day EMA just overhead, there is a possible end in sight for that rally.




The SPY (S&P 500 / C-fund) may be testing the bottom of a bull flag although that sloping flag pole is not typical of a bull flag. There is solid support where a couple off support lines meet the 50-day EMA. The cup and handle formation we noted yesterday did not pan out. We'll take it day by day to see if it can hold but if that support is taken out, there's a pretty good void of support down to the 200-day EMA.




The longer-term chart shows one level of support broken (red dashed) but one line of support where the old long-term resistance line used to be (red solid), and that's where the SPY hit its low yesterday.




The DWCPF (S-fund) took a major hit losing 2.25% yesterday and poking its head just under the bottom of its channel, and as significant, down below the 50-dayEMA. That 3 to 5-day closing rule below support starts it's count here at day 1.




The EFA (I-fund) posted a negative reversal day but because of the weakness in the dollar, it actually held up a lot better than the U.S. indices. There's some support at yesterday's low, otherwise it may be in the middle of a trading channel.




The dollar gapped lower yesterday, and that's the reason for some relative strength in the I-fund. The 200-day EMA is down near 26.50, right about where the February low was.




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

Tom Crowley


Posted daily at TSP Talk - Market Commentary

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