TSP Talk Blog

Stocks snapped back after the downside rubber band got a little overstretched. The indices blasted off for 2-3% gains with the Dow gaining 548-points. Some solid economic data may have had something to do with it as job openings hit a record 7.1 million in August, but the futures were rallying sharply beforehand so the market may have just been looking for excuse to bounce back.

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Volume was not all that heavy yesterday, which can be good, or can be bad. The light volume can either mean that there's a lot more people out there who sold last week in heavy volume, who have cash and still need to buy. For the bulls they're hoping that the scared money hasn't bought yet, but will eventually when the pain of being left out hits them. On the negative side of that is the possibility that the big money is not buying now and they may be selling this rally before long.

If you were in stocks yesterday you obviously had a big day. Hopefully you missed some of the downturn and it was profit. But before we get too bullish and optimistic, don't forget that volatility has been elevated and looking back at a chart from earlier this year when we saw a correction play out, some of those big bounce-back rallies failed rather quickly. This is January into mid-May of this year... The blue arrows show big rallies off the lows. Some (red arrows) saw quick reversals back to those lows.




Another scenario which is even worse, but did not happen earlier this year, is where the rally fails and we see lower lows. We're talking bear market now and while we haven't hit that yet, it's possible.

I'm tempted to just end it at that today because I have no idea how this will play out. It will likely be one of the first two scenarios above, but picking one is a guess at this point. If you guess wrong and it's scenario #3, that could get painful.

I'm just saying yesterday was a big positive, but don't jump right back thinking you know what will happen. There's a chance, small, medium, or large, I don't know, that we'll see the lows again or even lower lows.

If you're new to following the market you might think this is just another buying opportunity like we've seen over and over during the last several years. That may be the case. But if you had an account in 2008 or back in 2001 and saw what was possible during a bear market - the S&P 500 lost 40% in the 2008 bear market, and the Nasdaq lost about 90% during the bursting of the dot com bubble - that changes you. They are not all that common, but we haven't had one in 10 years, and every bear market starts with a 5% to 10% pullback.

We're getting earnings season started and we saw a mix last night with Netflix beating and rallying but IBM disappointed and sold off.

Earnings will do their thing but another major catalyst coming up is the midterm elections, which is 3-weeks from yesterday and could determine the eventual fate of the market, so I don't know how much buying conviction there will be leading up to it.

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The S&P 500 / C-fund rallied sharply back above the 200-day EMA. This looks good and action like this in a positive long-term trending market generally leads to more upside. In a down trending market it would be a different story and rallies would need to be sold. Not every stock chart is still in an uptrend, however, so let's see how this reacts to any overhead resistance and it looks like the 2820 area will be its first test. The 50-day EMA is still almost 50-points above the current level.




The DWCPF (S-fund) had a huge day and big days like this tend to come after major downside action. This one is still below the 200-day EMA so perhaps some skepticism here is warranted if it starts stalling near 1400.




The Dow Transportation Index is testing the 200-day EMA. Is that small open gap near 11,000 enough of a draw to take back the 200-day EMA? We'll know here soon enough.




The EAFE Index rallied nicely but this chart is still broken and in a downtrend so what I said about the S&P 500 above, does not go for the I-fund here. Rallies should be sold in down trending markets but the rallies have been pretty big here.




The High Yield Corporate Bonds rallied and have reached back up to the 50-day EMA. It could be a relief rally but if this can get back above the 50-day EMA the bull market in stocks will have more fuel to rally on.




The AGG (bonds / F-fund) was up slightly but there is still some resistance near 104.80 which is the neckline of a head and shoulders pattern and it can be stubborn.




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

Tom Crowley


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