TSP Talk Blog
The November 19 sell off
by , 11-20-2018 at 01:11 AM (842 Views)
Stocks tumbled to start the week with the Dow dropping nearly 400-points. The tech stocks, particular the ones that led this market higher like FAANG stocks, have been getting beaten down with many in bear market territory being down 20% off their highs. The Dow and S&P 500 are only about 8% off their highs so which is the one leading now? Either the indices have further to fall, or those FAANG stocks are getting cheap enough to buy.
Daily TSP Funds Return
We still have not tested the October lows on the S&P 500 and that is probably something on the agenda, but I really didn't expect that to happen during a holiday week so it will be interesting to see if the bears can keep up the pressure heading into the normally strong days surrounding Thanksgiving.
You can see in the charts below that Monday of this holiday week, 11/19, had a below average record but nothing that would have given us any clues about a nearly 400-point decline. But the same goes for the positive bias on Wednesday and Friday. While those green bars and blue dots look impressive and shows well above random returns, the average return on those two days is +0.41% and +0.36% respectively. The S&P just lost 1.66% yesterday so average gains won't cut the mustard. The bulls get a bump from these biases but it doesn't necessarily mean the S&P will get Monday's losses back that easily. Trading volumes will be low and volatility is high in this environment and "average" returns is probably not what we should expect.
Tuesday has a healthy positive bias this week but after the losses on Monday we're more likely to see another big move. It could be a turnaround Tuesday or another down day, I don't know. The point is, volatility is high and while the bulls have a seasonal advantage this kind of market environment may not play into the typically quiet Thanksgiving week so I'm not sure how much we can rely on it. But Wednesday and Friday should be more quiet with a slight advantage to the bulls - no more.
Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk
Chart provided courtesy of www.sentimentrader.com, analysis by TSP Talk
I noticed the headlines yesterday were a bit dramatic, and with trading volume drying up they can add to the emotional trading and push the indices as we saw yesterday. But it will probably be true for any positive tariff or interest rate news as well.
Bottom line, I have been concerned about the market in general thinking we may be mimicking some of the 2007 action which led to the 2008 bear market. But that doesn't mean stocks will go down every day for the next several months. It may be tough for buy and holders to make money if my theory is correct and we do see signs of potential a recession in 2019, but market timers can make money if things go their way and avoid being greedy by taking profits quickly, and they aren't afraid to buy into emotional fear. Rallies can be explosive in bear markets but they can be quick and unforgiving if you are wrong.
So, if you think we're at the cusp of a recession and a bear market environment, you can hibernate and miss the action by staying in safety, which could save you a lot of money. Or you can take what those bear market rallies can give you and try to make money in down years - or at least minimize losses. It sounds easier than it is since emotions are very high when stocks are moving quickly.
The S&P 500 / C-fund tried and failed again at the 20-day EMA. Yes, it is below the 50 and 200-day EMAs, but failing to get above the 20-day EMA, something that should be relatively easy, is a warning sign. But of course we've had many signs that something is different than what we've been used to. The bottom of that gap, which was filled last week, was tested again and held. That seems to be the line in the sand for now between a possible holiday rally and a test of the October lows.
The DWCPF (S-fund) gave back all of its gains from the two-day rally to end last week. This is not a great looking chart and needs help fast.
The Dow Transpiration Index actually held up relatively well but still posted a loss and remains below the 50 and 200-day EMAs. It looks like a possible bull flag and an inverted head and shoulders pattern - both which are generally bullish, but the market as a whole is not acting bullishly so it really needs to move above those EMAs to give this one a bullish check mark.
The EAFE Index / I-fund has been broken for a while and unless you're just picking your spots to try to make short term gains, this one also needs to improve greatly before it looks buyable.
The High Yield Corporate Bonds closed below the July 1 low, and that's not good. It has been falling for nearly two weeks so it may be due for some relief, but this is acting poorly and looks like rallies need to be sold until something changes - such as getting back above the 200-day EMA.
The AGG (bonds / F-fund) was flat but bonds have stabilized for now above those lows and above some key support (old resistance.) It could turn out to be a trading range between 104.00 and 104.80 so 104.80 is the area I'm watching to see if there are any changes to this bear market in the bond market. On the lower end, 104 could be considered the bottom of a bear flag.
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
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