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Market Commentary

November 29, 2021
 
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 Today's Commentary         (Not seeing a current commentary?)


Investors were blindsided on Friday, a half day of trading that most of us expected to be a quiet day with a bullish holiday bias based on decades of data, but instead stocks were met with a major sell off and one of the worst days for stocks in some time.  The Dow lost 905-points and all of the TSP stocks funds lost over 2% on the day.  Bonds rallied as investors looked for safety after the new COVID variant scare.

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If you've read my commentary for a while you know I can get a little paranoid at times, and Friday's action certainly brought that out in me, but maybe that had something to do with me being on the wrong side of Friday's trade.

You know what we've been talking about here; that the Wednesday and Friday surrounding Thanksgiving Day have some of the best historical records on this seasonality chart that I have posted a few times last week.  The Friday after TG Day had been up in the neighborhood of 75% of the time with an average return of +0.37%.

        
                                 Chart provided courtesy of www.sentimentrader.com


What better day to blindside investors with a new COVID variant, with most people home with family not even paying attention?

I have been quite skeptical of the market for some time but as we've seen, the upside had been relentless despite some signs of trouble leading up to Thanksgiving, but surely the positive seasonality would keep any trouble off for a couple of days.  Not to be.  I was fully invested for the Thanksgiving play with the intention of selling after a Wednesday / Friday rally, or early this week, but the massive drawdown on Friday threw a wrench into that plan. 

At this point, after a major move like that, we probably have two possibilities.  Either the market bounces right back this week after hearing that this new variant, while apparently quite contagious, is not very potent, and actually sounds like the symptoms are similar to that of a slight flu or the common cold.

But the other option is a more typical sell off playing out.  Since the market has been due for a correction after the monster rally off the recent lows, it is not always easy to bounce right back from a big down day like we had on on Friday.  You've heard of the dead cat bounce phenomenon, I assume?  The theory there is, if you throw something from a high enough level and it lands with a thud like stocks on Friday, it would not be easy for it to just get up and run away.  Some damage is usually done and it could take time for it to repair before bouncing back.  (Apologies to cat lovers out there.  It's just an old saying in stock market-ease.)

The move was reminiscent of the unusual selling in December of 2018 where many of us were expecting at least some kind of pre-Christmas bounce, but instead Christmas Eve - also a half day of trading and historically a very positive day, had a loss of over 2%, but it also happened to mark the bottom on that correction.

      


The futures have not opened yet as of this writing so I don't have a good idea which way this may go, but expect some big moves in the coming days, in one direction or the other, or both.

We saw big reversals in both the 10-year Treasury Yield and the dollar with both falling sharply on the day.  For yields, the drop pushed bond prices and the F-fund up as investors looked for some safety.  For the dollar that was a big change in direction, but it may have been due for some digestion of the recent gains.

           


The bond ETF TLT rallied with bond prices and I would say that this chart could tell us a lot in the coming days.  A breakout to the upside of this bull flag would probably indicate that this is a change in character for the stock market as investor would be embracing the safety of bonds.  If it flips back toward the lower end of the flag, it would probably coincide with a bounce back in stocks.  

             

                       
We saw some the knee-jerk reactions in economically sensitive stocks and commodities as the scare of a new variant sent the price of things like the airline stocks and the price of oil reeling.  But like this chart of crude oil, we saw several charts come down to test some key support and / or moving averages, so there is a possibility that these could hold and the worst is over already.  However, if the selling continues, than the problem is bigger than the one day wonder.

         


As I mentioned above, most people probably weren't paying much attention to the market on Friday, but while watching or reading the news over the weekend, they were likely enlightened and that could cause some Monday morning selling.  The reaction to that selling will be the key.  Does it get bought up right away, or does it linger for a while?  Perhaps a Turnaround Tuesday is setting up? 

And of course the other option is that this news was just triggering what the market was trying to tell us for some time with all of those Hindenburg Omens type of warnings as the internal numbers became quite negative despite the S&P 500 clinging to all time highs.

If I had to guess, I would say stocks will be higher by the end of the year.  But over the next one to three weeks it is more uncertain as there is some internal damage, and now some technical damage on some charts, and even if we do bounce back right away, there's always a chance of a test of the lows after a rebound.

I'm not an economist but I do have concerns about 2022 because of the Fed's new stance on interest rates.  Ironically, any new COVID scares could put rate hikes on the back burner and actually help stocks.  But if they do raise rates in 2022, there is a tendency / motto, or whatever we want to call it that says, if the Fed raises three times, a bull market will run into trouble.  


The S&P 500 (C-fund) consolidated near the highs for a couple of weeks before Friday's surprise mini-crash.  The chart is flirting with the 50-day EMA for the first time since the October lows, after it had gotten very extended above it in recent weeks.  There's a confluence of support between 4550 and about 4580 that will likely be tested early this week.  Look for some kind of bounce back this week.  The question is whether to hop on that train, or to sell any rallies.  So far not much has changed in the indicators to suggest the bull market is over.  That usually takes some time to develop, so calling a top now now would be a guess rather than a technical indication.

          


The DWCPF (S-fund) had been holding at that orange moving average all year, and Friday's sell off pushed it below it rather easily before it bottomed and started to reverse back up and close just below the average.  It could be do or die for the small caps since the support has been holding for so long.  Of course we could also see a fake out to the downside, similar to the failed breakout earlier this month.

         


The Russell 2000 small caps index also hit a major moving average, one that has also held all year.  It got a boost off of it on Friday so this could determine how severe this pullback is  going to be if this doesn't hold this week.

         

The EFA (I-fund) has been lagging of late because of the strength in the dollar.  Friday's sell off sent it right through the 200-day EMA, which is surprising considering how far above the 200-day EMA the S&P 500 is (about 10%).  You can see the trading range it has been in since April and with it is flirting with the lower end of the range, that makes this week that much more importation for the I-fund. 

        


BND (Bonds / F-fund) rallied as investors piled into bonds with the COVID scare.  Even with the rally we see that the head and shoulders pattern is still intact, and the 50 and 200-day EMAs basically held as resistance at the highs on Friday. 

        


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. We'll see you back here tomorrow.

Tom Crowley

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Chart provided courtesy of www.sentimentrader.com
 
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