TSP Talk Blog

Stocks gapped open higher on Monday morning and other that a little sharp decline scare when the open was sold off, the indices stabilized and almost effortlessly moved higher from there into the close. The Dow gained 399-points, or 1.58%, while the broader indices were up closer to 1%, and the small caps gained "just" 0.58%.

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The rally off the lows has now recover about 3/4 of the loss that the S&P 500 had during the correction. That's pretty meaningful and not what we might expect if we were going to see a test of the lows, but the elevated volatility (VIX near 16) probably means we won't go back to the early January easy street action, but clearly the bulls seem to be emboldened again.

The question is, will excessive bullishness be the correct sentiment and attitude for this market going forward because when we have 1% moves in stock indices (up or down), and volatility is above the levels we saw almost all of last year, something is different and what worked so easily in 2017 may not work the same way in 2018. But we'll see. The bears have been wrong for a long time now.


The S&P 500 / C-fund got the breakout from the bull flag it had created, and it gapped up at the open to emphasize the move. The S&P 500 Index, as opposed to the SPY ETF, rarely has open gaps on it but right now there are three open gaps on this chart and I expect them all to get filled eventually, but which ones will be first is the question?




The small caps / S-fund also broke out from a bull flag, which was the theme of the day. There is some immediate resistance off the highs, but that doesn't look very strong at this point. Those open gaps above are potential upside targets but with the VIX elevated, it may not be as easy of a move as it was in 2017.




The Transportation Index had a big day on Monday but it could technically still be in a bear flag, although the move above the 50-day EMA takes away one level of resistance.




The EAFE Index / I-fund gapped up, broke above its bull flag, filled one of the open gaps and stopped. There's another big gap near 73.0 and that would be a target if this blue gap doesn't act as resistance.




The High Yield Corporate Bond Fund moved back above the 50-day EMA for the first time in 19 trading days, so that's a plus for the stock market, but we like to wait 3 to 5 days before confirming a breakout.




The AGG (bonds / F-fund) rallied sharply early on Monday and it broke out of the descending trading channel, but it closed weakly and back in the channel. It could have just been a test of the 20-day EMA but as we have been saying, bonds probably need to be sold on any strength rather than bought on weakness. At least until this chart improves.




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

Tom Crowley


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