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Market Commentary

January 18, 2022
 
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Stocks bounced back from some early losses to close mixed on Friday.  The Dow lost 202-points, which was nearly 300 points off the lows of the day, so there was a nice intraday rebound.  The S&P 500 poked into positive territory before the close, but small caps and the I-fund lost some ground on the day despite the late push higher.  The dollar was up giving the I-fund some trouble, and yields rallied again sending bonds and the F-fund down sharply.

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Not to dwell on my rant last week about the TSP deadlines, but I wanted to follow up after Friday's action.  The indices were making intraday lows before the TSP deadline on Friday, and then again in the early afternoon, but then rallied during the final 2.5 hours into the close.  If anyone made an IFT in the morning, or did not, because of the action on Friday morning, you may have wanted to change your mind based on the afternoon move.  It actually benefited me this time since I did a little selling on Friday so I got a little better sell price, but it doesn't seem to go that way very often - for me anyway :) .  And a positive reversal is generally not something we always want to sell so I may have changed my mind as well -- I don't know for sure.

This chart of the S-fund index DWCPF shows that it was on the verge of breaking down at its lows on Friday.

              


Instead, the index made a low at about 1:30 ET and then started to head back up to close at the highs of the day creating a bullish positive reversal day.  Right before the TSP deadline, or at 1:30, our decision making process may have been completely different.

     

I understand that there may be some administrative reasons for an earlier deadline, but the 10 AM ET deadline is overkill at this point with blink of an eye processing going on around the globe in the financial markets.  I also understand that they think we shouldn't be trying to time the market but, as a buy and hold investor being at the mercy of the market that can go down 40% to 50% in a couple of weeks as we saw when COVID hit the world, it certainly does not give us a feeling of safety or comfort.

In the U.S., the stock market has always come back.  But that's not always the case with markets and one example that has stuck with me, as someone who started getting involved with the stock market in the 1980's, was the demise of the Japanese stock market in the 1990's.  It went from nearly 40,000 to 7,000, not bottoming for decades after that initial decline off the 1990 high.  It has come a long way since 2008, but it is still 10,000 points, or would have to rally another 33%, to reach that all time high from 1990.

        

That's a dramatic example and a few hours in one day wouldn't make that much of a difference here, but this is one of my arguments for why buy and hold is not the safest way to invest.  Buying and holding probably killed mom and pop investors in the Nikkei from 1990 to 2008.  However, I would bet that companies like Goldman Sachs made a killing trading that market over the years.

OK, I guess I dwelled on it.  Let's move on.

So we ended last week with that positive reversal on a Friday, which tends to bode well for the start of the next week, but it was a long holiday weekend and pre / post holiday reversals can happen.  This week is an options expiration week, and earnings season also starts to kick in more heavily so we have some catalysts, but the market is really focused on the inflationary data and the Fed's plan to deal with it, which can be a roadblock for stocks.

The Fed plans to raise interest rates and reduce their balance sheet.  They are doing it to control the rising prices that we're seeing, and in doing so it could have a negative impact on the economy. 

On Friday GDPNow lowered their fourth quarter GDP growth estimate from 6.8% down to 5.0%.  Back in early December the estimate was 9.7% so it is sliding fast.  A 5% move is still very good growth, but of course that is a year over year comparison to the recessionary numbers we saw in 2020, so it comes with an asterisk.

The decline is significant and, as I believe I've mentioned before, economists say that a 1% interest rate hike can take 10% to 20% off corporate earnings, and the Fed is foreseeing four potential 0.25% interest rate hikes in 2022.  Stock prices therefore are adjusting now to this development, and it's why many analysts are predicting a 10% to 20% decline in the indices some time this year.

The buy the dip mentality that worked so well for so long may start to wear in investors if stocks keep moving lower.  At some point they may stop buying and then we'll get some kind of capitulation low, but that could be a long way from now with the S&P 500 currently just 3% off its all time highs.

It won't go straight down, and of course it may not go down at all - no one knows for sure, but that's why it's important to have the ability to react, whether that is to react swiftly or often in a volatile environment, and that's also why the TSP really needs to give us more flexibility in our accounts so we have the ability to compete with the rest of the world who are already able to do it.



There's some good news, bad news set ups on the S&P 500 chart right now.  Friday's positive reversal is a generally bullish short term indication.  However, being that it was right before a long holiday weekend makes it a little suspect.  There's a head and shoulder pattern forming, but in an uptrend and bull market, they aren't as bearish as when they show up in a down trending market.  The chart is above that red rising support line, but Friday's close was below the 50-day EMA.  So, it's a mixed bag at this point.

         
 

The DWCPF (small caps / S-fund) is not looking as good despite the positive reversal.  The reversal may give it some upside momentum to start the week, but there's a lot of resistance all over this chart, including Friday's high which was still underneath that red trading channel.

         


The weekly chart of the DWCPF (S-fund) shows the recent breakdown from that pennant formation which had been intact since the start of 2021.  There was a failed breakout in November, and since then a new downtrend has started.  If things get ugly, that 1600 may be the ultimate downside target, although a lot could happen that could avoid that.  The blue descending wedge pattern is actually a pattern that tends to break to the upside, but it could still drift below 2000 before that happens.

         


The EFA (I-fund) has been holding up relative well, and the recent pullback in the dollar has been helpful.  It's above the 50-day EMA and in a rising trading channel so it is not a surprise that this fund is leading the U.S. stock funds over the last two months.

         


BND (Bonds / F-fund) hit that old support line, which failed earlier this year, and it has now turned into resistance, and it closed at a new low.  At this point the only thing that might save this chart and fund would be a weakening of the economy so that yields start to pull back again.  But who really wants that to happen?

         


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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SPY (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

(Stockcharts.com Real-time)

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