TSP Talk Blog

Stocks fell sharply as the volatility continues. The day started out with a 150+ point gain for the Dow after the release of the jobs report, so the big positive reversal day we had on Thursday did its job of following through on the upside at the open, but it failed to hold and the Dow ended the day down another dramatic 559-points.

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It was the second lowest closing level for the S&P 500 during this correction, being about 0.50 above November 23rd's close, but it is still about 100-points above last February's 2018 low.

One of the members in our forum made a comment about 2% moves feeling like a common occurrence, and that's a great point. It's another form of complacency assuming stocks will snap back, as they tend to do, but it may also mean that there could be more carnage to move this complacency to another level of fear before investors capitulate. Whether that will be the case or not, I don't know, or whether we're in that kind of environment yet, but if you've ever invested through a bear market you know that it can last much longer than you think it could, and the losses just beat the bulls down into an eventual submission, and it doesn't feel like we've gotten there yet.

How can you tell when we're in a bear market? Officially they say when something is trading 20% or more off it's recent highs, that it is in a bear market. There are other ways to determine it like trading below the 200-day average, or you can just look at the chart. If the chart starts near the bottom left and ends in the top right, you're probably in a bull market.



If it starts near the top left and ends in the bottom right, then you may be in a bear market.




Whether it is a bear market or not, we might still expect some kind capitulation low, which would be worse than these 2% declines - just enough to scare out those who have become comfortable with the 2% moves.

I may be overdramatizing it since bear markets are rare, and buying dips in a bull markets are great ways to invest. It's just that I was the victim of investing / trading during two of the biggest bear markets - 2000-2002 and 2007-2009 bear markets - and I remember that feeling after buying the dips back then that turned my accounts into chop suey. During the dot com bubble burst of the early 2000's, the Nasdaq lost 78% of its value as it fell from 5046 to 1114. The S&P 500 lost 45% during the financial crisis.

That's no 10% correction. That's destruction. I'm guessing / hoping that we'll see nothing like that happen, but even a fraction of that will put a major dent in your account, so don't take what's happening too lightly. If stocks bounce back, we'll see that and I can change my outlook. I hope I'm wrong, but just remember, if you're more worried about picking a bottom than losing money, there may be more downside to go. Oh, and by the way, bounce back rallies can be explosive in bear markets, so when we do get a capitulation low, that will be when to buy. How will know when it gets here? As Supreme Court Justice Potter Stewart famously said about defining pornography. He said, "I know it when I see it."

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The S&P 500 / C-fund continues to trade in that wide range between 2600 and 2820 and the question is whether this is forming a big bear flag, as we have been discussing. Obviously that would be bad news and the downside target would be at least 100 points below the bottom of the flag. But the 2625 area has been holding firm and the bulls need to keep buying at that level to prevent the breakdown. The PMO indicator may be troubling because often the second crossover below the moving average can be worse than the first. See the EAFE / I-fund ($IEE) chart below for a possible roadmap.




This year to date chart shows that this correction, number two in 2018, hasn't even fallen to the levels we saw at the lows last February. Point-wise it is about the same, but because we saw new highs in August / September, there was a longer way to fall to hit that February low.




The DWCPF (S-fund) has pretty much the same story, as do many charts. We have bear flags testing their support. They could snap back into the flag, or breakdown and hit bear flag target levels. If they do breakdown, watch the close. They could come back and make it a fake breakdown. If they do breakdown and you are in, getting out on a rally back to the bottom of the flag can give you a reprieve and another chance to sell. But where it lands at the close, above or below the flag support line, is the key. Again we're looking for some kind of capitulation from the bulls.




The Transportation Index broke down from its bear flag last week, and this chart went from promising, to ugly in a hurry. This breakdown gives it a technical downside target between 9300 and 8600.




The I-Fund (EAFE Index) was the first TSP stock fund to breakdown. That was back in June. Since then it has acted as if in a bear market where you should anticipate bearish outcomes. The "death cross" occurred in July, and from there every attempt to climb back above the 200-day EMA has failed. And the 50-day EMA is also failing. This is the concern for the S&P 500 now since it just experienced its death cross. One positive for trading purposes, is that the EAFE continued to hit that 200-day EMA and didn't bust lower until October, so perhaps the S&P has a chance at a couple more bounces back to the 200-day.




The price of oil has stabilized but looks like another potential bear flag after a series of small bear flag breakdowns. Lower oil prices are a good thing and almost a stimulus or tax break for consumers, so it may ultimately help the economy, but for now it could be a sign of the oil market reacting to a global economic growth slowdown.




And along the same lines, the bond market (F-fund) just broken out, on the weekly chart, above a long-term descending resistance line. If this holds, it is another sign of potential economic weakness. Yields tend to go down, bond prices up, when inflation is easing and growth is slowing. Like oil falling, this could help the economy because it may be signaling to the Fed to stop raising rates, which they have been considering. But both both oil and bonds are signaling a slowdown in economic growth.




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

Tom Crowley


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