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TSP Talk: Getting choppy out there during options expiration week

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Stocks opened lower after a bullish night of futures trading, but once yields started to rise we saw the indices rollover quickly. The Dow lost a modest 100-points and that outperformed the broader indices which were down 0.5% to 2.0%, depending on the index. Small caps took the brunt of the selling yesterday with the yield on the 10-year T-Note rising sharply above 4% to new highs, but overall the losses just gave back some of the recent gains they accumulated in recent days.

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First things first. The company that hosts this website had technical issues yesterday causing TSP Talk to go down intermittently for hours yesterday, so my apologies for that. I am writing this Wednesday evening and they still have issues, so I am hoping that I will be able to upload this, and you will be able to read it, by Thursday.

Some mixed results in recent earnings reports after the bell yesterday but the big news was more chart related as we saw a sharp pullback after the big two day rally, so the volatility hasn't gone anywhere.

It is options expiration week which is often more volatile than an average week. The movement can be head scratching, but a lot of it might be attributed to large option position holders who need to see specific prices to keep that position from closing worthless at Friday's close. So this back and forth seems par for the course in this already volatile atmosphere.

I think the weekly chart of the S&P 500 may be telling us the best story, and it shows how vulnerable the situation is, yet encouraging if support holds. The 200-day EMA is a biggie on this next chart as many corrections have fallen to this level and mostly held. The Covid crash was an exception, but that was remedied just weeks later.

After a dreadful breakdown last week below the 200 EMA, we have seen a push back above it, and right now the S&P 500 is about 14 points above it. That's a good sign, but clearly just 14 points is not a stable position.

Sure, a retest of last week's lows is possible but closing above that average on Friday seems important, and being an options expiration Friday makes it all that more interesting to watch unfold.

The trend is still down on that chart so I am not hopeful that the bear market is bottoming yet, but you can see how big some of those rallies are when the index bounces back up toward the top of the descending channel, even in a bear market.

The yield on the 10-year rallied, and the dollar was up and this put pressure on the stock market which has been taking its cues from this dynamic duo for weeks, if not months now.

This chart of one of the market leaders - the Dow Transportation Index, has been consolidating off the late September lows, but unfortunately that seems to have formed a bear flag which can be deadly in bear markets. A move above 13,250 or better yet, 13,500 would be the remedy for that flag. There is a big open gap near 13,450.

Being earnings season, the market may ebb and flow with each important report while filling the void between inflation related data and Fed meetings and commentary, etc., so it could get noisy. My thoughts are that the bear market rally has more to go, but I won't fight too hard against evidence that suggests otherwise.

The S&P 500 (C-fund) lost some ground yesterday but it was a little constructive as it completed filling the gap near Monday's closing price, that was created on Tuesday, and then it started to bounce back. The old resistance line, which was broken on the upside on Tuesday, held as support near yesterday's lows. The PMO indicator is now above its moving average and often the crossover initially creates a very short-term overbought situation that causes a dip, which could be what we're seeing now.

The DWCPF (S-fund) also settled on top of an old resistance line but it really needs to hold in that area otherwise a test of the prior low becomes more probable. The 1500 to 1650 area has been so important and the bulls and bear are battling to see which end of that range breaks first - and holds.

The BND (bonds / F-fund) was down again and it tested last week's lows as those yields keep moving higher. Is this an options week fake out, or will bonds just keep making new lows all year? The Fed hasn't done a great jobs stifling the economy yet, so that is helping keep yields up.

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Thanks so much for reading. We'll see you back here tomorrow.

Tom Crowley

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  1. JTH's Avatar
    Pulled out of BND Bonds at 84.80 and broke even. I remember at the time hoping I wouldn't regret that decision. Now it's in the high 60s, so that's maybe the single best decision I've made this past year.
  2. tsptalk's Avatar
    Great move!

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