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Sell Off!

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It was a bit of a bloodbath for stocks on Wednesday with the Dow suffering an 832-point loss and all indices closed at or near their lows. Large caps were hit a little harder than the Russell 2000 small cap index, probably because small caps had already been beaten down. The Nasdaq was hit the hardest losing over 4%. The market seems to be making price adjustments in this new higher yield environment.

Daily TSP Funds Return

In Tuesday's commentary I posted a chart of the High Yield Corporate Bond Fund (HYG) and said, "The High Yield Corporate Bond Fund fell hard for a 4th straight day but yesterday it hit the bottom of its rising trading channel and held. Corporations have to offer higher yields to compete with government bonds, and when the yield they have to pay on their bonds go up, the price of their stock can get impacted negatively. That may be what we're seeing in the stock market right now."

Yesterday we saw the HYG give way to support and that is what is spooking investors and sends them running.




Those of you who subscribe to the TSP Talk Plus service know that we've been fairly bearish recently, looking for a better opportunity to buy. You never know how a shakeout like this will play out so I don't know for sure if this is it, but we are seeing some clues that the weakness in stocks is not being confirmed in areas that tend to do well when stocks are falling.

Gold, for instance, was up just 0.16% yesterday and remains close to 2-year lows.



Then there's bonds. Yes, yields are moving higher and that's causing the concern in stocks, but investors tend to buy bonds when they sell their stocks. Not so far...



The Utilities are a very defensive play and tend to move up when growth stocks are being sold. Not yesterday. They were also down.




Is this a sign that the bottom is in? No. Is it a sign that perhaps the damage done was just a readjustment of price rather than an outright sell everything and head for the hills event? Whether this takes hours, days, or weeks to work itself out, I don't know. But I assume we'll see higher prices by the end of the year. Which route it takes to get there however, is going to have to be your guess. There's always a chance that it could get worse before getting better.



The S&P 500 / C-fund plummeted 3.3% yesterday and on a day like that support lines don't tend to mean as much since it is more emotionally driven. There are some support levels in the current area, and then there's the 200-day EMA which is always a good place to reevaluate any downturn. Also in that area, as "quabit" in the forum pointed out yesterday, there's an open gap from July down by 2765. Volume was high suggesting some panic selling, and the the VIX was up 44% confirming that.




The DWCPF (S-fund) fell through the 200-day EMA like a hot knife through butter. There's some possible support near 1360 but at this point the low may need another "puking" day (sorry for the visual). Lows tend to come when investors say, "get me out at any price... just get me out!"




The Dow Transportation Index also cut through the 200-day EMA. There is an open gap just below and that could be a downside target.




The EAFE Index fell through some support and there's another layer just below. It's an ugly chart but possibly due for a bounce soon. Of course the selling and downside can last a lot longer than seems reasonable so there's no guarantees.




The AGG (bonds / F-fund) was flat on the day so investors have not jumped into bonds yet with this sell-off in stocks. It could be fear of rising yields, which would keep pushing bond prices down, or it could just be that stocks still look better to many investors right now.




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


Posted daily at www.tsptalk.com/comments.php

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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)
AGG (F Fund) (delayed)

(Stockcharts.com Real-time)