After the most explosive come-back rally in history for stocks going back to the December lows, we have volatility picking up after a failed breakout a couple of weeks ago. Is this significant or just a much needed rest? We never know for sure, and the question is, is that answer going to be determined by the outcome of the China trade negotiations, or is this all noise and what is going to happen is going to happen regardless?
The weekly charts show some interesting patterns, although there's different stories depending on which index you look at. The weekly S&P 500 chart shows that it is back below the January peak, creating what could be a double top with the October highs, or maybe we can consider it a triple top, which are more rare. Triple tops usually result in a breakout to the upside, but in this case we've already had a failed breakout so it is suspect.
Now this could be a long consolidation process that proceeds a major breakout that will take stocks to a new leg higher, and the obvious economic data (jobs reports, etc.) has been improving, if not holding steady in a positive mode, but with stock prices at historically high valuations, and some internal economic data showing signs of troublesome weakness (see
Citigroup's basket of economic indicators has fallen to its lowest level since the Financial Crisis), can stocks breakout to even higher levels? Maybe, but the risk / reward may be leaning on the risky side.
On the flip side, stock valuations have been elevated for some time and low interest rates, basically 0% for many years, were a good reason why. They've come up some but bond yields are falling again and S&P 500 dividend return may be an investor's best bet for a decent return, and that may be reason enough to keep valuations elevated near historic highs. That's where we stand fundamentally, but technically we're seeing some issues.
If we look at one of the largest U.S. stock indices, the NYSE Index, you can see that there were no failed breakouts but instead we've had a series of lower highs and a lower low. So, if we focus on the average stock and not one of the big high flyers that are keeping the S&P and Dow up, I'd say the U.S. stock market peaked 16 months ago, and now it may be looking to pull back from that recent lower high.
The weekly chart of the small caps DWCPF Index, or our S-fund, is also below the January and October 2018 highs and it didn't make a higher high this year like the S&P 500 did. As I mentioned last week, the only acceptable outcome for these charts is to make new highs, or there is a big technical problem.
Now let's compare the above stock charts with the weekly chart of the AGG, or bond ETF that our F-fund tracks. Since the S&P 500's January 2018 peak, bonds have risen steadily higher.
And of course a Money Market account - not exactly our G-fund, but the same idea, just plugs along very slowly to the upside with no virtually no risk.
So when you look at all of those charts, and forget about the news headlines, tweets, jobs reports, economic data, etc., which of them look appealing to you, and which look like ones to possibly avoid for a while? I suppose if you have the answer to that it may help you determine your allocation.
Short-term - anything can happen and I am all for trying to pick my spots to buy whether in a bull or a bear market, but right now it seems like the stock funds have some obstacles. If we see a breakout to new highs after this pullback, then that changes things. But I think the stock market has to improve technically before I consider anything more than hit and run positions.
The S&P 500 (C-fund) was making a move mid-week last week before Friday's selling, but we also saw late selling even on the positive days. Friday's negative reversal was dramatic, but as we saw during the previous Friday / Monday, not all reversals see follow-through, although that is the norm. That red box is an important little range since a breakout above puts it above that resistance line, and break below puts it below the 50-day EMA, so I wouldn't be surprised if the S&P trades within that entire range again early this week.
The DWCPF (S-fund) had a horrible day both gains-wise, and technically as it had a major negative reversal day and failed to remain above the 50-day EMA after spending one day above it.
The Dow Transportation Index also failed at the 50-day EMA and the trend has been down since the April highs. The 200-day EMA is the last level of support until about 10,000.
The EFA (I-fund) also created negative reversals on Friday, as well as failing at the 50-day EMA, and you can see that the rising trend broke earlier this month.
I'm actually surprised that the I-fund was positive last week given the losses in U.S. stocks, plus the strength in the dollar. Something tells me Monday's I-fund price may be adjusted downward.
The AGG (Bonds / F-fund) inched higher again but flirted with a minor breakdown below the current rising trading channel. A pullback to that 108.65 wouldn't be a bad thing, but it would have to hold there.
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