TSP Talk Blog

Stocks drifted down most of the day, but a late spike higher kept things under control. The Dow dropped "just" 60-points, but this time the S&P 500 and small caps were the laggards.



The C and S funds were hit hard dropping 1.8% and 2.4% respectively, while the I-fund, with the help of more weakness in the dollar, lost just 0.45%.

The S&P 500 finally gave a convincing break to the downside of the rising wedge. We expected a break, but we did not know when, or how high the S&P could go first. Now we know, but the call for more downside action may not be that easy.


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

The chart looks bad in my opinion, but it still hasn't moved below 851, the prior low. If that breaks, that will not be a good sign.

Jason from sentimentrader.com brought up some interesting stats once again (it really is a great site). He understands the strong seasonal bias going forward, but he explains his main concerns, but there's a twist...

From www.sentimentrader.com:

1. We're in a bear market.
2. The rally has been relatively weak, with the S&P not even at a one-month high.
3. The 21-day Up Issues Ratio is 23% above its six-month average.

All three of those issues seem like they should give us a bearish bias looking forward, much more so when we combine them all together.

So let's look back over the past 68 years, and try to find any other such occurrences. The table below highlights all such occurrences since 1940, along with the performance in the S&P 500 going forward.

... [this shows] quite a bullish tint going forward.

Even though the underlying breadth of the market was clearly overbought in these precedents, the extreme nature of the buying thrust was a sign that we were seeing nascent buying demand that tended to continue, and had a predisposition to occur later in a bear market rather than sooner. Three months later, only two instances showed negative returns (and one just barely at that).

More surprising is that six months later, all but one were positive and with an admirable average return of +15.1%. On average, the worst the S&P dipped at any point during the next six months was -3.7% compared to an average maximum gain of +16.5%, showing a reward more than four times greater than the risk. Obviously, since we're seeing greater volatility now than at any point in history, we need to take these average returns with a grain of salt if trying to apply them to our current situation.

- Jason Goepfert

I found that very interesting, and combined with the bullish seasonal bias over the next week or two, it certainly gives us something to think about.

If the S&P 500 can make a higher high over yesterday's high of 887.37, that may be enough for me to use my first transfer in December. If it fails to make a higher high before the deadline today, I will just wait another day to decide.

That's all for today. Thanks for reading. See you tomorrow!