TSP Talk Blog

The selling continued on Friday turning a modestly positive week for the S&P 500, into a negative one. The Dow lost another nearly 500-points just as investors are anticipating the annual Santa Claus rally. We saw a few breakdowns in the charts and some critical levels being tested in others. Will the Santa Claus rally materialize in the coming week or two, or will investors be finding coal in their portfolios this Christmas?

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Just another 2% move for the major indexes, this one down, and as we've talked about before, we may be seeing a little complacency as far as investors getting used to 2% declines (or 2% rallies, for that matter). This is a very different market than what we had a year ago. It feels like something is going to have to give fairly soon to scare out some of the weaker holding bulls into a capitulation where they have had enough. When that happens, it should set up a very good buying opportunity, and we may be on the brink of that. A few of the charts are suggesting they are ready for something like that to happen.

The two day FOMC Meeting ends on Wednesday and we will get the new policy statement and a probable rate hike. I think the only thing that could stop a rate hike at this point would be a breakdown in the market before the meetings. That would set up an interesting situation and actually confirm my theory above about a possible capitulation sell-off / reversal this week. Of course whenever you predict something the market tends to humble us, and something completely different happens, so I'm certainly not convinced about anything.

Also, we are in a bear market right now as far as I am concerned, and while bear market rallies can be explosive, they usually have to be sold eventually at resistance. Hopefully the charts and indicators will clue us in on when to do that because these rallies can be so exhilarating that you can get hypnotized into believing everything has changed for the good. That's not usually the case in a bear market.

I am writing this on Saturday so I don't have any head's up on what the futures are doing. This market is starved for some good news. If it gets it this weekend, we could get a pop higher, but what I think this market really needs is that final flush that could set up a reversal and a [short-term?] bottom heading to the holiday week.

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The S&P 500 / C-fund did not make a new low, but it did make a new closing low for this leg down. There were 3 other closes below 2600 this year but all of those came earlier in the year. It is hanging onto the bottom of that parallel channel's support line. A breakdown would likely be ugly, but the indices are getting quite oversold as we head into the stronger seasonal period so we may see some attempts to rally at some this week, but there may have to be some short-term damage done first to turn this beast around.




The weekly chart shows an ominous sign as the large bearish head and shoulders pattern may have just broken down - depending on how you draw that neckline.




The DWCPF (S-fund) broke below the October low last week but it is hanging on by a thread to the bottom of its parallel channel. That is a bearish looking flag but the fact that is sloping downward is actually not a horrible sign. Bear flags tend to slope upward before they break down. This could turn out to be an "F" flag (upside down F) and they can break to the upside when they finally finish sloping down. It's very touch and go here.




The Transportation Index also broke down to new lows last week and it closed on Friday at another 2018 low. It has sure come down hard since the peak and reversal above 11,000 on December 3. It may be due for some relief at some point this week.




The Financials have been acting poorly as well. The negative reversal on Friday, and lowest close of the year, makes it a candidate for a possible melt down.




The I-fund (EAFE Index) has been in trouble for a long time, but if there's any positive to be mentioned, it's that it did not make a lower low on Friday. Otherwise, the chart starts in the top left and ends in the bottom right, so what does that tell you?




The High Yield Corporate Bond Fund is backing down from the 50 and 200-day EMAs again. Another bearish looking chart in need of some help. If this one can't rebound, I doubt the S&P 500 will either, but perhaps an oversold holiday rally is due?




The AGG (bonds /F-fund) is remaining buoyant with stocks selling off, but the double top is still holing. If it does pull back, that open gap looks like a potential target.




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

Tom Crowley


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