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Relentless

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Incredible. In unprecedented action, there has never been a Christmas Eve with a loss of 1%, let alone nearly 3%. We've been through depressions, financial crises, the crash of 1987, the dot com bubble bursting, yet we're currently seeing relentless downside action that is some of the worst market action we've ever seen over in a short period, and now it includes the seasonally strongest part of the year. Is it possible that it is merely interest rates, tariffs, and a government shutdown? That doesn't make a whole lot of sense to me. There must be more to this, but what?

Daily TSP Funds Return

Yes, this market has come a long way in the last two years, and many stocks were overprices with multiples (price to earnings ratios) that were out of whack. I have been bearish and am not too surprised that we're getting a decline in prices. If you've been reading these commentaries (although I've talk more about it in the "Plus" reports) you know that we've posted those large bear flags on the charts and we've expected some bearish action, but the downside breakdown has already exceeded bear flag targets, so the magnitude and speed of this decline is not something I expected. Now to see a sell-off on Christmas eve of nearly 3% is just so out of the ordinary to the point of it never happening before, and you have to wonder, what is going on?

This quoted section below is from our December 10 commentary, written December 9th:

"Whether it is a bear market or not, we might still expect some kind capitulation low, which would be worse than these 2% declines - just enough to scare out those who have become comfortable with the 2% moves.

"I may be over-dramatizing it since bear markets are rare, and buying dips in a bull markets are great ways to invest. It's just that I was the victim of investing / trading during two of the biggest bear markets - 2000-2002 and 2007-2009 bear markets - and I remember that feeling after buying the dips back then that turned my accounts into chop suey. During the dot com bubble burst of the early 2000's, the Nasdaq lost 78% of its value as it fell from 5046 to 1114. The S&P 500 lost 45% during the financial crisis.

"That's no 10% correction. That's destruction. I'm guessing / hoping that we'll see nothing like that happen, but even a fraction of that will put a major dent in your account, so don't take what's happening too lightly. If stocks bounce back, we'll see that and I can change my outlook. I hope I'm wrong, but just remember, if you're more worried about picking a bottom than losing money, there may be more downside to go. Oh, and by the way, bounce back rallies can be explosive in bear markets, so when we do get a capitulation low, that will be when to buy. How will know when it gets here? As Supreme Court Justice Potter Stewart famously said about defining pornography. He said, "I know it when I see it.""


Well, we haven't had that "capitulation low" yet, nor those "bounce back rallies [that] can be explosive in bear markets" . So yes, the action wasn't a complete surprise. But now it's the lack of any relief that's the surprise. Not even Christmas Eve could do it, and that's a bigger surprise. Historic.

As far as how TSP Talk Plus has played it, we nibbled on the 11th and bought in 30% putting us partially in stocks on the 12th - just in case that support line held. That left us with 70% in cash (G). The slide started and by the 18th we made the plunge and an IFT to 100% stocks to take advantage of the normally strong seasonal period. By the 19th we were fully exposed to stocks and we've paid the price every day since. It's been rough and on Monday, Christmas Eve of all days, for the first time all year our 2018 return ticked into the red, with three trading days to go in the year.



I'm probably giving away too much information to our non-Plus subscribers, but I'm guessing only the die hard TSP Talk readers are seeing this today.


This chart from our friends at sentimentrader.com shows that investors / traders, in this case small unsophisticated traders, that are buying puts (bets against stocks) at an alarming rate. Historically they are almost always wrong when they hit extreme numbers, and that is the case right now. You can manipulate stats to get them to show what you want but it's hard to argue with a 100% record. And the dates we are comparing them to now are the dot com bubble and the financial crisis when these instances occurred last


Chart provided courtesy of www.sentimentrader.com



So everything I see suggests that we are due for a rally that will make these small traders wrong, but so far they have not been wrong.

On Monday I saw posts from some of our forum members saying things like, "I'm out.", "Can’t take it anymore either, I am out", "Too much risk/uncertainty. Moved to F in case this slide continues." Everyone's situation is different and at some point they have taken on enough pain, but at this stage in the downturn, this is a form of capitulation. We haven't had the big capitulation reversal like day, but we've had record volume so it feels close.

A wise approach for day traders who can act in an instant might be to get out of the way of this market and wait for some kind of reversal before jumping in. But the problem for us and our TSP and the timing of the transactions is, we could be down 500 points on the Dow in the morning, and if the snap back reversal occurs in the afternoon, after the TSP transaction deadline, it means you're out the following day as well. So we'd miss the reversal day and the follow up day, and they can be huge. So, being defensive is one thing, but in a market this oversold, if you've already taken some big losses, you may need to take on risk to benefit from a rebound, which is most certainly going to come at some point.

Bear market rallies often come back to the 200-day EMA and that's when I would be selling. Not now. But the one concern I have is what I said earlier about something happening that we are not seeing yet. I don't want to be irresponsible and suggest a terror attack or something similar is coming, but I use this illustration to show that the market seems to sense when something is up. Yes, we were in a bear market in 2000-2001, but there was an unusual sharp spike down of about 10% in the weeks JUST BEFORE the 9/11 attack. And that's why I feel that something is happening that we don't know about. Either way, an eventual snap-back rally to the 200-day EMA is likely in the cards.






The S&P 500 / C-fund is in a waterfall-like decline and while we have already had record breaking volume, there has been no sign of a low, or buyers for that matter. That 5 billion share trading day was an all-time high and that kind of activity usually comes with some kind of capitulation. That makes the light volume decline on Christmas Eve a bit disturbing.




This long-term monthly chart shows the S&P 500 testing the 50-month moving average. That's not an impenetrable level, but it could bring in some buyers in the short-term. There is also a long-term rising resistance line going back to the 2009 lows that is crossing near 2300. There's more support at 2200 but that's another 150-points below the current levels. We may get there eventually, but probably not without a relief rally in there first.




The rest of the charts are equally beaten down and the indicators are all at extreme levels that would normally precede some relief, but that doesn't mean the market won't try again to scare those still in stocks, out of them.

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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Comments

  1. djlc86's Avatar
    Tom,

    Great commentary! Looks like you were right about a relief rally, but will the S&P 500 take another turn downward towards 2200 like you said?!?! Let's hope not. I am one of those folks who had enough and bailed earlier this month and before the rally today I was ahead of the C/S by 8% this month alone, in a less volatile market I would have already bought back in, as an 8% advantage is amazing, obviously. I definitely don't want to miss the rally back up, that's for sure. I have 1 IFT left for the month/year, looking to get back in so I can be in the market for the "January effect", which I think definitely applies to this year's end.

    Hope you had a great holiday! All the best to you in 2019!!!

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