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The rebound keeps stretching

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It was another nice day for stocks yesterday although the early trading made it look like we could see a Turnaround Tuesday. A big opening was completely lost in the first hour or so of trading, but buyers showed up again and took the indices back near the high into the close. The Dow ended the day up 256-points with similar 1% gains in the S&P 500 and Nasdaq, while small caps led again with a gain of about 1.5%.

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The rebound off the lows obviously still has momentum, but it is getting a little stretched at this point. The S&P 500 is about 10% off the lows, and we'll show this in some charts below, while the initial rally after the February sell off in 2018 was 11% before the test of the lows started.

The recent rally in stocks is showing how short investor's memories are. Yes, a lot of bad news was priced into the market but since Apple's negative guidance and big sell-off in stocks on January 3rd, we're not seeing a similar reaction when other companies are telling a similar story. For example, yesterday Samsung announced a potential revenue short-fall of 29% for next quarter. 29%! Apple only guided down about 10%. Yet stocks rallied yesterday. Has all the bad news been priced in?

World Bank released its 2019 global economic outlook and they used terms like "darkening skies" to describe this year's forecasts which is for 2.9% growth, and that is lower than 2018's figure. Of course this isn't big news to the stock market since it had sold off for two months on this very premise, so it may have already reacted. Or has this rally been a smoke before the next shoe drops?

The FOMC meeting minutes come out today and could cause some fireworks, and as we've talked about, they were a lot more hawkish at that December meeting then they were last Friday when the falling market put a little pressure on them.

The S&P 500 / C-fund kept the rally going and is inching toward some short and longer term resistance, which we have been talking about. That's a possible bear flag but a nice little recovery in a very short time. The 50-day EMA may be a tough test after this recent move higher as the rally may need to pause, even if it doesn't test the lows, since it is getting quite overbought on a short-term basis.

On a closing basis, yesterday's close is actually very close to reaching the low close from the correction back in February, which could get some investors to start taking profits. It's the 2575 - 2625 area that everyone will be watching.

On a bar chart the strongest resistance would be at 2625 where the 50-day EMA is meeting the old weekly support line (blue dashed) that broke down in December. The current rally is about 10% off the late December lows. I also marked the rally in February 2018, which was 11% from low to high, before a test of the lows started. There was an 8% rally in October / November that eventually rolled over as well.

There were other examples in 2016, 2015, and 2011 but I'm showing the 2008 chart because it had both sharp relief rallies of as much as 18% that failed just as quickly, and by comparison the early 2008 declines were slow developing and the relief rallies were equally slow in response. The harder the charts fall, the faster they rebound, but like the dead cat bounce analogy goes, it's difficult to recover from a fall like that and just run away unscathed.

The DWCPF (small caps / S-fund) has certainly been the place to be during this rebound, but it too is running into some impending trouble with all that overhead resistance.

The Dow Transportation Index had a big day but ended with a spinning top candlestick formations - a potential reversal pattern. Plus it's still in an obvious bear flag.

The EFA (EAFE Index / I-fund) rallied but ran into one of its bear market blockers, the 50-day EMA, and stalled.

The AGG (Bonds / F-fund) pulled back again as move money moved from bonds to stocks, but the fact that they are not far off their highs tells me that the bond market may not be as convinced about an economic recovery as the stock market is.

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:

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

Tom Crowley

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  1. Cactus's Avatar
    delete duplicate comment
  2. Cactus's Avatar
    Looks like you posted another copy of the S&P500 chart under the F Fund commentary instead of an AGG chart.
  3. tsptalk's Avatar

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