TSP Talk Blog

Stocks took a break on Wednesday and we saw modest losses across the board - a rare event so far this year. The Dow shed 21-points while tech stocks lagged with the Nasdaq falling 0.36%. Earnings are still coming in, but they are winding down as most of the larger S&P 500 companies have reported.

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Earnings and earnings growth are slowing and the concerns for recession this year, or next, have been heightened, but as we saw with Apple, after falling sharply on their earnings warning, they came back to beat their lowered expectations and the stock rallied. That seems to be the theme. We saw expectations become extremely negative so when things did not fall apart, investors came back with a fury buying those beaten down stocks.

Now the question is, has the rally gone too far in the other direction, given the global slowdown, or is it just a matter of time before we see new highs?

One interesting data point I remember from years ago (Don Hays used to talk about it) was that when employees are voluntarily quitting their jobs at a higher rate than normal, usually because they found a better one, it was a sign that a recession may be nearing. It was saying that things had gotten too hot and like an overly bullish investor, the path of least resistance turns to the downside.

John Hussman posted this chart this month showing something similar where the difficulty in obtaining a job has come way down in recent years. On the contrary, jobs are everywhere. But that's not a great sign in the economic cycle. Notice in the chart that recessions (the grey areas) occur at or just after this indicator comes down to about -3, which is about where it is now.


Chart provided courtesy of www.hussmanfunds.com


The opposite is also true: When jobs are very difficult to get, we are usually deep in a recession and that's usually getting closer to the end of a negative cycle, and the start of the new bullish cycle, like we saw in early 2009 above when the financial crisis was wrapping up and the stock market was bottoming.

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The S&P 500 / C-fund backed off slightly from that 200-day Simple Average that we have been watching since the 200-day EMA broke several days ago. Historically the 200-day averages have been significant as you'll see below.




Here's the S&P 500 from back in 2008. It had fallen below the 200-day SMA in late 2007 and stayed there until one day in May of 2008 after a 16% rally pushed it above it - for a day. That turned out to be the peak of that big bear market rally and the disastrous 2008 bear market resumed.




Does this look familiar to anybody, as we look at today's chart.




The DWCPF (small caps / S-fund) was down slightly and sits between its 200 day averages, exponential and simple.




The EFA (EAFE Index / I-fund) pulled back and filled a small open gap from Tuesday. It had taken out some resistance during this rally but you can see there is more in the 63.50 - 63.75 area.




The AGG (Bonds / F-fund) was also down slightly after rallying early. It looks primed for a breakout again but as we showed last week, I believe, other attempts near this level going back a couple of years has led to long consolidating sideways action in bonds.




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

Tom Crowley


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