TSP Talk Blog

Stocks were flying high early on Wednesday as investors were expecting the Fed to rescue them from the recent bearish action, and Powell did basically what most expected, but it wasn't enough. The stock market wanted a more dovish stance, so the Dow turned a nearly 400-point mid-afternoon gain, into a 352-point loss by the close. It was a 1.5% loss for stocks on the day, but 3% off the highs, so it felt much worse. Volume was very high as we've come to expect on Fed days.

Daily TSP Funds Return More returns

After a Fed meeting and rate decision, it's not a surprise to see an overreaction in either direction. The big early gains were a product of an oversold market looking for the Fed to give to investors a Christmas present, but as usual the market humbled those who thought they knew what was going to happen. It turns out that the the Fed was not as accommodative as many had hoped and investors threw a tantrum. Welcome to central bank interventions. Where's Janet Yellen when we need her? The market seemed to always rally after she spoke. :-)

We've been anticipating some kind of capitulation sell-off that would turn into a reversal, and after the negative downside reversal shortly after the announcement of the rate hike, there was a potential for a perfect setup for that capitulation to happen yesterday, but it didn't manifest. But we're that much closer, if that's any consolation. You can almost hear it... "Get me out - sell everything!" That said, the VIX is only at 26 and that was flat on the day. Hmmm.

If you recall, we saw a 500-point rally in the Dow in November after Jerome Powell suggested the Fed was getting closer to neutral interest rates so, expecting the dove to show up, investors were disappointed when he raised again and said 2 more hikes are on the table in 2019. By the way, that 500-point rally only held for one more day in November so investors were using anything to sell in this bear market.

That doesn't mean we will never get another up day for stocks. But the market was looking for help yesterday, and it didn't get it, and that just pushes investors that much further into a fearful state, which is what we tend to see when the downside starts to get overly exhausted. We obviously weren't at that point quite yet.

The negative outside reversal day on the charts also suggests that we could see more downside, at least early on Thursday, before any upside. A positive open would probably be sold initially, but a tradable low cannot be too far away, if we didn't see it already yesterday.

Administrative note: President Trump issued an executive order Tuesday evening closing federal offices and excusing employees from duty on Dec. 24. The TSP has posted the closing on December 25, but nothing yet for the 24th, so perhaps they are processing transactions on Monday the 24th.

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The S&P 500 / C-fund was down sharply breaking to lower lows on Wednesday, and as we've mentioned before, stocks haven't acted well this year after the FOMC rate hikes. Volume was high, and normally that's a good sign of a reversal, but as you can see with the blue arrows below, those 3.3 billion share days did not produce reversals on rate hike days like the other red 3.3 billion share days. We also saw continued selling after the prior rate hikes and this one runs up against the strongest seasonal week for stocks of the year, so the battle is on.




The DWCPF (S-fund) is in bad shape but certainly oversold so the chances of a relief rally are getting high.




The Transportation Index was hit doubly hard because of that warning from FedEx the night before. That's another 3% cut from this already beaten down chart.




The EFA (I-fund / EAFE Index) made a new low and we've written this one off for some time now. At some point however, we'll see one of those big 1 to 2 week rallies that make you forget it's in a bear market.




The dollar was up slightly yesterday, but before the Fed announcement it looked like it was on the verge of a breakdown from that trading channel. That would have been a bullish move to help stocks, but it was erased - although technically it only rallied back up to test the bottom of that channel so it may still be getting ready to break down.




The Volatility Index was surprisingly flat on the day. That's very peculiar and either a very good positive divergence or, as you see on the chart, it is basing for its next breakout to the upside.




The AGG (bonds /F-fund) was up big at one point today before reversing back and closing with a modest gain. That reversal could be the start of a pullback to at least fill that open gap near 105.60. Bonds look like they need a breather, but stocks will probably have to perk up before that happens.




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

Tom Crowley


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