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TSP Talk Market Commentary 03/09/2020

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It's getting difficult to come up with new words to describe this market action. Yes, it happens every year or two historically, but it always seems to take us by surprise when it happens. Because the Dow was near 30,000 at the peak, percentage wise 1000-point moves are not that dramatic but because they are so rare, it has our attention. On Friday the near 900 point loss turned into a 257-point loss with a quick 640-point rally in the final hour of trading. Things are moving quite fast.

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The jobs report came in much better than expected with 273,000 new jobs being added in February, with additional positive revisions in prior months. But Wall Street wasn't too impressed knowing that the data is rear view mirror numbers and right now everyone seems to be focused on how much the coronavirus is going to disrupt the economy going forward.

It seems hard to believe, but the Dow and S&P 500 were up nicely for the week. The Dow gained 450-points last week and the S&P 500 added 0.65%. Of course in the volatile market those kind of numbers can come and go quickly. The futures could open down 500 points for the Dow. That's been the MO of this market the last two weeks.

Just as the market goes up longer than seems reasonable or possible, the downside is the same, although the market tends to erase gains a lot quicker than it took to make them. Investors had gotten extremely bullish just a few weeks ago, and now it will take time for them to totally give up on the market. That's when the lows will be in. It could take a few weeks to play out. In the interim, we'll see a lot of volatility just to confuse you.

You'll see dramatic rallies that the bulls will celebrate, then alarming failures where the bears will claim victory. It will be tough to keep up but for the most part, in the coming weeks, the more nervous you get about the market, the closer the low is likely getting. The more emboldened you get during a relief rally, the closer it is to rolling over again, until the cycle is completed.

Remember this chart?

It wasn't long ago that we posted this talking about how close we were to the euphoria stage. I'd say we're at least half way down the slope now, and the capitulation / despondency will come after the next rally fails and we test the lows again. I don't think we're there yet, but as we've said before, the rallies in between can be explosive, and we saw two examples of that last week with gains of about 1200 points in the Dow on both Monday and Wednesday.

We had been expecting a market correction for a while and it took long enough to get here. Remember all of those Hindenburg Omens, Titanic Syndromes, negative diverges on the indicators, yield curve inversions, etc., that we talked about for weeks, if not months, but it wasn't until the coronavirus popped up that we finally saw a reaction - a catalyst.

We've been concerned about how low the yield on the 10-year had gotten and last week was historic. The Fed cut rates 0.50% last week and they'll likely do another 0.50% at their meeting on March 18, and this helped push the yield down below 1% for the first time ever last week.

Historically, the trend in yields has been down for decades. This 40-year chart may have been telling us a for a long time that we were heading closer to 0%. The question now is, will U.S. bond yields fall below 0% as we've seen in other countries? The upside resistance line is slightly above 2%, so which comes next... 0% or 2%?

While that shows the fear in investors, it also brings up the point of where else can investors put their money if bonds and savings accounts are paying virtually nothing? People will buy stocks - eventually. They just have to get passed this emotional period. It's not the first correction we've ever had and eventually the smart money will start buying as the blood flows in the streets. And the herd will eventually follow.

In the interim the market will be volatile and there could be good trading set ups but remaining nimble is important. Unfortunately, with our 2 IFTs per month we can't be as agile as we may want to be.

As FDR said, the only thing we have to fear, is fear itself. That's what's causing the sell-off right now, but fear will impact the economy so it's a self-fulfilling prophesy. It won't last forever so don't go hiding in a bunker for too long. There will be opportunities all around us if you're looking and not hiding.

After a weekend of fearful coronavirus news, early indications are showing more negative numbers for Monday morning, but like last week, that could change in a hurry. It's getting ugly out there, but my guess is that we'll see some brave, some might call them crazy, dip buyers show up before the end of the day.

Update: An oil price war is causing additional chaos in global markets and the equity futures were halted overnight. This isn't good. We will likely see huge swings in the indices today as dip buyers battle the panic selling of others. Buckle up.

The S&P 500 (C-fund) was heading near the prior week's lows late on Friday, which has been a trend this year. I think there's only been one positive Friday all year. But like the prior Friday there was a late positive reversal. Both still closed in negative territory, but the prior Friday's reversal turned into a big Monday rally. Of course that failed and the roller-coaster ride continued. I still think that 5 billion share trading day on February 28 was a solid low that might be tested again, but could be the low - or close to it - when all is said and done. If the futures are any indication however, that test may come today.

The weekly chart shows the S&P 500 right back into that red trading channel. We saw the major breakdown from that zone in late 2018 which turned out to be a great buying opportunity for those brave enough to but down there, while the excesses of the late 2019 rally took it well above that comfort zone, and now it's corrected again. The open gap above 3300 is always a possible target but watch that 3100 area for some resistance.

The DWCPF (S-fund) did not hold, on an intraday and closing basis, the lows from February 28th on Friday. That's troublesome but it's not too much of a surprise that the growth type stocks are getting hurt more as investors opt for more stability. When the bottom is eventually in, the small caps will likely try to play catch up, but for now the large caps feel safer to investors.

The early 2018 chart of the DWCPF does show a similar formation that turned out to be a meaningful low at the time, although it later was tested and failed in late 2018.

The Nasdaq has been holding up better than the others as it still has not closed below its 200-day EMA despite a couple of intraday breakdowns. It may have its work cut out for it today with the futures looking so bad.

The High Yield Corporate Bond Fund was in the same boat until Friday where it finally closed below the 200-day EMA. The positive reversal bodes well for another move higher early this week, but it will likely have a tough start.

The AGG (bonds / F-fund) closed off its highs on Friday when stocks reversed higher, but it made yet another all time high as yields tanked as we talked about above. These are historic moves and things tend to move further than you would think possible when emotions are heightened. I'm not sure I would touch bonds here, but I said that week ago and look what's happened since.

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

Tom Crowley

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  1. dannyboy's Avatar
    Coronavirus will be fading? I did some seeking data and I found that past virus; were bad, got worse, them warm weather started and they faded. The details to each outbreak differs, but in general; They get worse than, previous ones(PO's), They are more expensive to cure, They're overall economic effects are worse than previous PO's. With all the crazy swings in the market, I needed to do some thing different. I had a dream over the weekend and the Prophet Daniel, I, me, could not interpret this? I decided to follow some advice BIRCH once gave me. Never chase, markets go down, but then up, just invest for long term.

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