TSP Talk Blog

It was a bumpy ride for stocks on Wednesday with the indices opening sharply higher on the day, but those morning highs didn't last long and we saw a steady decline late into the afternoon pushing most of the major indices into negative territory before a final hour rally pushed many of them back near break even. The Dow was up about 260 at the highs, then down 25 at the lows, finally closing up 73-points. The S&P 500 was flat while small caps lagged with a modest loss.

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As expected, the Fed didn't make a move on interest rates yesterday, but it looks like March will be the time that they will pull the trigger. There policy statement did initiate that afternoon sell-off, but as I said, we saw a bounce into the close.

One of our readers asked me why stocks are going up so much and wondered if it was because of the new administration's policies, quantitative easing, etc. I'm not much of a fundamentalist in that I prefer charts and indicators to valuations. The reason for that is because I feel valuations are baked into the charts and the indicators can usually (but not so much lately) tell us when things have gone too far - up or down.

The tax plan is certainly a big part of the reason for the rally as corporations will save a bundle in taxes, as will many individuals, and also the reduction of regulations will help businesses make money, and earnings are the key to valuing stock prices. The question is, have stocks overshot the anticipated benefits of these changes, are they still underestimating the impact, or are they already priced correctly?

As far as quantitative easing goes, that has been unwinding and the Fed is now actually in the process of raising interest rates. Why has volatility been so low over the last several years? Well, since the 2008 recession, interest rates have been pinned near 0% and money managers had a hard time making returns in anything but stocks. But now that the Fed has a Federal Funds rate target over 3% in the next couple of years, volatility may come back into the market, and just this week we may be seeing the shift.

This long-term chart of the VIX (Volatility Index) shows that we may have broken a long-term descending trend in volatility.




Like I said, I'm not an expert on stock valuations, but I hope that quick synopsis helps you understand a little more why stocks have been rising, and why volatility may be starting to creep back into the market.

The January jobs report will be released on Friday and estimates are looking for a gain of 180,000 jobs, and an unemployment rate of 4.1%.


The SPY (S&P 500 / C-fund) was basically flat, failing to follow through on a morning rebound, but also holding near Tuesday's lows. This is kind of a neutral sign. It could be stabilizing after the two-day pullback, but the fact that the bulls weren't there to buy a 2-day dip may be a sign of a change in character. It's a little too early to say.

The small caps / S-fund were down again but found some support at the bottom of the parallel rising channel.




The Dow Transportation Index was basically flat and is also struggling to rebound after breaking through a major support line last week.




The EAFE Index / I-fund was down again, also falling through the rising support with little support underneath it now.




The AGG (bonds / F-fund) reversed from some early losses and closed with a slight gain. This chart still has some room on the upside for a relief rally, but the trend is clearly down, and it is now fixed below that 200-day EMA.

Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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

Tom Crowley

Posted daily at www.tsptalk.com/comments.php

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