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Market Commentary

January 20, 2022
 
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Yesterday was not a good day for stocks, in more ways than just the closing losses.  It showed us that investors and traders are in fact in "sell the rallies' mode.  We saw the indices open with decent gains, pullback, then stabilize again and move back up, but that second push higher also failed, and eventually the indices closed at the lows of the day.  The Dow lost 340-points and as we pointed out yesterday, fell below a key trading channel.  The Nasdaq and small caps continue to lag.

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Yesterday was another example of the tale of two markets.  We had the morning session, which for us ends at noon ET with the TSP deadline, and the afternoon session, which takes us to the close four hours later.  We saw the bulls making some attempts to lift the market off the recent lows early on, but by the close that failed, and of course that type of action brings with it the difficulties of making a decision before our noon deadline.  Volatility is rising and it wouldn't be easy no matter when that deadline was in this current environment, but those four hours can be very stressful if you based your decision on the morning trading.

This 10-year Treasury Yield took a day off from its recent rally after the run up from 1.35% to over 1.87% at yesterday's highs.  That didn't stop the bleeding in the stock market however, and the early attempt at a typical relief rally for stocks didn't hold, and that's more of a reflection on the speed of the recent move up in yields, and where interest rates may be heading in 2022.  So a minor pullback in yields didn't ease anyone's concerns.

          

The dollar gave back some of Tuesday's gains and that pushed it back below the 50-day EMA.  This helped gold, silver, copper and oil to big moves higher yesterday, and kept the I-fund somewhat buoyant.

Yesterday I highlighted the break down in the Dow chart.  Today we see some additional damage done to the Nasdaq chart.  After falling below that purple 135-day average, which had a habit of holding up on prior pullbacks, it has now taken out the 200-day EMA, which will get the attention of money managers, traders and investors as a sign that the bull market could be breaking down. 

      

Often we get breakdowns like this where it initially take out the stops of traders below support and ends up being a capitulation low, so now the key will be how it reacts to reading below the 200-day EMA.  Yesterday was close #2 below the average and I generally look for 3 to 5 closes below to confirm a breakdown.  By the way, it is also below the 200-day simple moving average, which is about 100 points higher that the EMA, and it is also followed by many investors and trading programs that may be triggering off of it. 

At this point it is not the worst market ever - it's a market that is transitioning from a 0% interest rate environment, to a rising rate environment, and additionally a Fed who is no longer supporting the bond market with a bond buying program.  Could the selling get overdone?  Certainly, but where that point is, I don't know.  Markets tend to overshoot before finding a top or a bottom.



The S&P 500 (C-fund) gave up some early gains on Wednesday morning and it turned into another ugly day for stocks.  The rising support is clearly broken and at this point we'd be looking to see if the early December lows can hold.  But even if it does, that looks like a head and shoulders pattern, which is generally bearish, although not always when it is in a rising trend.  It's debatable whether this is a rising or descending trending market right now, but the fact that the head of this H&S pattern contains the all time high, I would say we have to consider that this is a head and shoulders in a positive trend.  If it does breakdown, then we might be able to officially say that the trend has turned negative.

         


... and the weekly chart might agree.

       
 

The DWCPF (small caps / S-fund) continues to to get sold and we saw another layer of support get taken out this week.  I was thinking that the bottom of the wedge pattern could hold as support, but not to be.  This one has closed below its 280-day average for four straight days, and 6 of the last days, and it took out the 200 day average a long time ago.  There's no doubt that this one is acting like it is in a bear market already.

         


The EFA (I-fund) held up OK because of some weakness in the dollar, and in the case of the I-fund, the late selling in the U.S. stocks which often doesn't get reflected in the I-fund's price until the following day, after the overseas markets react to it.

           
 

BND (Bonds / F-fund) got a decent bounce yesterday but the chances that this is creating some kind of bottom, other than a short-term low, is probably quite slim.  The open gap near 83.25 could be an upside target if the bounce continues but resistance is falling.

         


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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