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Market Commentary

January 21, 2020
 
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Stocks were mixed on Friday but another late surge took 2 of the 3 major indices to their highs of the day at the close.  The Dow was up 50 points, or 0.17% and that lagged the S&P500 and Nasdaq who saw percentage gains of about twice that.  Small caps and the Transports were down on Friday, as were bonds, while the I-fund was given a handsome gain of 0.44% despite the dollar rallying sharply, so I'm a little concerned about Monday's price being adjusted down.

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At this point anyone willing to hold onto stocks in this environment deserves every penny they are making because things are just so stretched, the risk just keeps growing, and the changes of a pullback get higher.  Ironically it has been the folks who have been waiting to buy and just can't stand being on the sidelines any longer, who are fueling this latest push higher.  At some point there will be no one (figuratively) left to buy because everyone will be in stocks.  Obviously by "everyone" I mean most people, and when that happens we'll likely see this thing finally peak.

That is the premise behind taking sentiment surveys, and only extremes really matter.  The theory being that if everyone has already bought, there's no one left to continue buying and there's only one way for stock to go from there.  And once that first person sells and the tick moves down, then there can be a rush for the exit because no one wants  to be the last one out.  And that is how a top is formed.

From there, if the selling accelerates we get to a point where everyone that was going to sell, has done so, a market bottom gets formed. 

It's never 100% bullish or bearish, but last week's TSP Talk Sentiment Survey showed 69% of those who responded saying they are bullish, and that's pretty high.  21% were bearish.  After nearly 800 weekly surveys that we have done over the years, only about 10 have resulted in bullish readings of 70% or higher, and we've never seen 80%.  So 69% is pretty extreme and while stocks can continue higher, they are getting vulnerable because when stocks start pulling back, much of this group will switch to bearish and be potential sellers.

The Senate impeachment trial starts this week and I suppose that could be a catalyst for stocks, although the market has basically ignored this D.C. noise for the last three years.  It may give President Trump an incentive to remind everyone how well stocks are performing, or throw in Tweets about tax cuts 2.0, or the like.  The problem is, the more Trump is talking about stocks, the more likely they are getting ready to peak.  Take a look at this chart from sentimentrader.com that compares the number of Trump tweets about the stock market compared to the Dow...

      
                                                            Chart provided courtesy of www.sentimentrader.com


He hit an all-time high last week.

One more thing, mostly for giggles since the sample size is so small, but I looked back at the start of the prior two decades, in 2000 and 2010, and noticed that stocks started to tumble the week after Martin Luther King Jr. Day both times. 

      

      



The S&P 500 (C-fund) made yet another new high on Friday and the chart is again testing the top of the rising trading channel that has been intact since the lows in October.  Perhaps a pause at a minimum, but the resistance line is also rising so there is still upside potential.  The question is, for how long? 

         


The DWCPF (S-fund) made a new high but turned negative and closed near the day's lows.  The angle of incline is quite steep making for a possible sharp correction, whenever this runs out of steam. 

       


The EFA (I-fund) was up nicely, made a new high, and it remains in the middle of its rising channel after a rather lengthy, and possibly healthy, sideways consolidation from mid-December.

        
 

The big rally in the dollar had no negative impact either on the I-fund on Friday, for whatever reason, but that could mean it's payback in today's price.  The breakout in the dollar from that descending resistance line is interesting and should get your attention if you are in the I-fund since a strong dollar can be a drag on the I-fund, compared to the C and S funds.

        
 

The price of oil found support at the 200-day EMA last week after that sharp sell-off, but so far it has bounced up to the 50-day EMA and stalled so it could be a test to see how severe of a pullback we could get in oil.

        


The AGG (F-fund / bonds) failed on Friday, to hold above that old resistance line.  That's not a great sign for bonds, but if there's an excuse here it could be that the open gap near 113 had not yet been completely filled yet.  I had been worrying about those gaps, and there are more below, although the only one above the rising support line is quite small and may not be a factor near 112.80.

        


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

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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