TSP Talk Blog

Welcome to February. Stocks pulled back sharply as the Dow lost an eerie 666-points on Friday, ending a week that saw the Dow fall over 1000-points. It was a very broad sell-off with all of the major indices shedding 2% or more on the day. Volatility is back and that is not necessarily a bad thing. Yes, it could mean that stocks may struggle, but it could set up better trading opportunities, and after the buy and holders had their fun in the sun, market timers will welcome a change.

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The January jobs report came in slightly better than expected, with a couple of negative revisions, but for the most part we saw enough growth in jobs and wages that it helped push bond yields sharply higher again as inflationary concerns and rate hikes have become the market's main focus. The other issue on Friday was the release of a GOP memo showing possible government misconduct. I don't know how much of an impact it had, but stocks did fall further after its release.

This kind of action is the price the market may have to pay for going straight up without creating support on the way. Bull markets don't die easily and in a normal situation it might take a little more backing and filling before this pullback completes, but in this market environment it wouldn't be a surprise to see the bulls push this right back up. Bonds and gold were both down too, and of course bonds falling had a lot to do with the selling in stocks, but the question is where are investors putting their money if they are selling stocks as well as the safety plays of bonds and gold?

Stocks don't tend to bottom on Fridays. More often a Friday sell-off will rollover into the next week, whether it opens higher or lower on Monday morning, to flush things out. The futures opened sharply lower on Sunday evening so that may be the case. The indications are for the Dow to open down another 1%, but it's very early and there's a lot of time before the open. So, if somehow stocks open higher on Monday, keep watching to see if that holds. If we see investors and traders selling a higher open, it means it needs more time to work things out. A "turnaround Tuesday" would be nice but maybe a little too easy to call. I expect the market to baffle as many folks as possible.

Here's some interesting stats on Friday sell-offs...




The SPY (S&P 500 / C-fund) fell over 2% on the day, falling through the 20-day EMA and closed at the lows, which was just below a rising support line. There is a very small open gap below 275, and that would be a reasonable downside target, but the 50-day EMA is at 272 and that can also be a draw for a bull market pullbacks.




The weekly chart of the S&P 500 shows just how far it had moved above its 50-week moving average. By comparison, before 2017, in stayed pretty close to the EMA, pulling back toward it each time it became slightly stretched above, and over the last several months it had become extremely stretched.




The small caps / S-fund came to rest right on the 50-day EMA. That 1380 area seems to be an area of strong support and so it may hold, but if we do see a few closes below that, it would be a problem.




The EAFE Index / I-fund gapped lower on Friday and in the process filled one of its open gaps (blue). There is not a heck of a lot of support between where it closed on Friday and that 50-day EMA near 72.




The High Yield Corporate Bond Fund was giving us some clues of potential problems after it had fallen below its 50-day EMA for three days before the Friday sell-off.




The AGG (bonds / F-fund) was down sharply again. This may be oversold here but be careful with bonds. They are in a downtrend and in a very ugly chart.

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

Tom Crowley

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