TSP Talk Blog

Stocks started the day as if the bulls were ready to put in the bottom on the recent pullback. Dow was up 286 at the early highs before things turned around and headed south. By the close the Dow had lost 166-points, for 452 point turnaround, but this time the recently hot Nasdaq and the small caps were the ones getting hit the hardest.

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Oil had another big day jumping an additional 3%, so things could have been a lot worse for the Dow and S&P if the oil stocks weren't up so much on the day.

It's difficult to say that yesterday's sell-off was trade war related since the small caps were hit so hard. Yesterday's action may have been more related to what the President is trying to do with Chinese investments, and the negotiating whipsawing we see in politics that impacts the market is not making investors very comfortable.

But rather than blame it on any one or two events, if we take a step back we see in the charts that the Dow and S&P have been coming off their recent peaks for a couple of weeks now, and the Nasdaq and small caps have been very due for a pullback. The action yesterday did nothing to help the technical picture as we saw many charts closing at 6 - 7 week lows, so it seems to be a typical technical pullback for now.

The Financials have now been down for 13 straight days, which is atypical and that's another new record for the XLF ETF. The 10-year Treasury yield is surprising falling with bonds rallied strongly yesterday as the yield curve flattens (short-term bond yields getting closer to long-term yields.) But the dollar was up and that pushed gold prices down again, so it's hard to say that there's a run toward safety yet.

Bottom line, volatility is back this year. Remember how long we went without a 1% move in the indices in 2017? This year there have been 36 1% moves in the Dow already -- 17 down, and 19 up.

We're looking at another holiday next week and the trading surrounding Independence Day has a strong positive seasonal bias, but pre / post holiday reversals can get traders leaning the wrong way. This chart is old but contains 61 years of data so I wouldn't call it outdated.


Chart provided courtesy of www.sentimentrader.com

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The S&P 500 / C-fund tried to fill the overhead open gap early on Wednesday and the big early gains nearly did it, but the reversal hit before it was complete so the gap is still officially open. The loss made it 3 consecutive days closing below the 50-day EMA which is a concern, and the next level of support, should the decline continue, is just below 2680, then 2670.




The small caps (S-fund) were hit hard again so what went up steadily for several weeks, came down quickly as the gains from mid-May to mid-June have been erased in just 5 days. It closed just below the 50-day EMA and is resting on the March peak.




The Dow Jones Transportation Index also took another big hit and it fell all the way to the 200-day EMA for an 11-day, 7% decline. The 200-day EMA has been holding all year but can it do it again?




The EAFE Index (I-fund) was down closing at a new low for 2018 although it is still above the February intraday low. And while China is not part of our I-fund, we have been watching it closely and it is now officially in a bear market being down over 20% from this year's highs. We knew that wouldn't go without a global reaction, and now we area seeing it.




The XLF Financial ETF chart looks similar to the EFA and it too closed at a new low for the year. As I mentioned above, it has been down for 13 straight days, which had never happened before.




The AGG (Bonds / F-fund) broke out of its basing pattern that we talked about on Wednesday, but as bonds tend to do, it broke in the opposite direction than I thought it might. That's probably why I rarely play the F-fund.




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

Tom Crowley


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