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Market Commentary

January 24, 2022
 
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Once again we saw an attempted rally turn south on Friday as the indices continue to get crushed, and the start to 2022 is officially ugly!  The S&P 500 has given up 7.7% so far this year, which I guess is only a modest portion of 2021's 29% gain.  Small caps are another story as they have now given back all of 2021's gains.  The Dow lost another 450-points on Friday.  Bonds rallied as investors moved toward safety.

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The action on an options expiration Friday was quite interesting as the normal manipulating based on heavily held positions at particular futures and options strike prices, didn't seem to be as much of a factor.  If anything, the excessive selling on an options expiration Friday could potentially trigger a reversal early this week.  That's just a hunch based on the new future monthly contracts being bought that replaced the expired ones.

As I write this on Sunday afternoon, the futures have not opened but I would suspect there will some big moves in the overnight trading.  Historically we see mom and pop reading the business headlines over the weekend and perhaps deciding to sell on Monday morning because they looked bleak, and the futures may try to front run that type of action, creating a short-term capitulation type selling that generally precedes a snap back rally.

The other possibility is some kind of headline that suggests the selling has been overdone.  Maybe even a comment from a Fed official who suggests that inflation may be more temporary with the recent decline in stocks and crypto-currencies? 

I don't know.  I'm obviously speculating, but I do know with the VIX nearly hitting 30 last week, that the moves will be big, whichever direction stocks go this week.  The green circles below show days where the VIX closed well off the day's high and that tends to be indicative of a temporary low in stocks.  On Friday the VIX closed fairly close to the highs of the day which suggests we could have another spike higher [in the VIX] before it reverses down again, which would then be more indicative of a potential relief rally coming.

          


Perhaps ironically, yields were down on Friday.  Ironic because stocks have been worried about how quickly yields have been moving up, but Friday's decline in yields and rally in the bond market was likely due to a flight to safety as investors move money out of stocks and into a fixed income. The 10-year Treasury Yield fell back below 1.8%.

           


The various weekly index charts look dissimilar in that the more speculative indices like the DWCPF (small caps) and the Nasdaq, have broken down below their 50-week moving averages (purple lines), while the International stocks (EFA) - with the help of a two-month pullback in the dollar, and the S&P 500 are still above their 50-week average.

          


Enjoy the ride.  It's going to be wild and volatility can provide great trading opportunities.  Of course only being allowed 2+ IFTs per month doesn't give us the opportunities others may have, but if you've been patient and waiting for a decline and an opportunity to buy lower, we could be close to at least a short term playable rally.  I'd probably be a seller of a rally this week - knowing I can buy next week if I need to with new IFTs, but I don't usually look that far ahead.  I just worry about trying to take advantage of imminent opportunities when we see them.

One caveat:  Market crashes don't usually come from over bought rallies near the highs.  They come from oversold markets that may seem ready to bounce.  They are very rare and we had one just two years ago, but stay on your toes.  Nothing is out of the question.  Traders could be get some margin calls this morning as the losses take account below their allowable margin levels, and that could mean another early bout of selling as they try to settle up the calls. 

Update:  The futures opened modestly positive, but don't blink.  :)



The S&P 500 (C-fund) dove lower into the close on Friday, an expiration day which made the action very unusual.  It landed right by the 200-day EMA where the bulls may try to do some buying but we could also see some stops get taken out after some possible margin calls and forced selling so it could really be a wild start to trading on Monday morning.  The 20 day average crossing below the 50 day average can be a sign of being oversold.  We saw a similar crossover in October.  We may not get a bounce as good as we got back then, but we could see a short term relief rally.

         


The DWCPF (small caps / S-fund) has been completely clobbered in recent months and on Friday it tested the low from back on the first trading day in January 2021, so it has given up all of those 2021 gains.  It is now down 20% from the November peak.  The chart is a broken down mess, but stocks don't go down forever.  Look for some bargain hunting at some point this week, but there's still a lot of overhead resistance.

         

The weekly chart of the S-fund shows some possible downside targets, even if we do get a relief rally in there somewhere.


The EFA (I-fund) is holding up a little better than the U.S. funds, but it is still down sharply in recent days.  It filled an open gap on Friday and is trading just below the 200-day EMA. 

           
 

BND (Bonds / F-fund) had a big day on Friday as investors finally moved money from stocks into bonds.  This chart is still broken so there's a lot more work to do.  The first thing it would need to do is get back above that old support line that it fell through earlier this month near 83.25.

         


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

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Thanks for reading.  Hope to see you back here tomorrow.

Tom Crowley

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Chart provided courtesy of www.sentimentrader.com
 
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