TSP Talk Blog

Stocks were flat to mostly lower yesterday, but it was a little worse than that since the Dow, down 27-points, gave back an early 200 point gain. And it took a very late move higher to keep it from being down 100-points. After leading on the upside on Monday, the small caps and Dow Transportation Index were hit hard on Tuesday, and it may get worse for the Transports today.

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There was a rumor of a breakdown in the trade talks with China, but who knows? It may be that the bears starting it. Whoever it was, stocks did react negatively.

FedEx reported earnings after the bell yesterday and was down 5% in after hours trading. That should put a hurt on the Transports again with UPS falling in sympathy. Plus it's one of those tells for the economy, although the European slowdown may be more of the problem than the U.S. side - I didn't hear what they had to say.

Today we get the Fed's decision on interest rates an a policy statement in the afternoon - probably around 2 PM ET.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." -- Mark Twain
That's also how the movie The Big Short starts, and if you haven't seen it, I recommend it. If you're a market geek, you'll love it. If you're not, you'll still like it. Somehow this uninteresting true story about the sub-prime mortgage debacle attracted actors like Christian Bale, Ryan Gosling, Brad Pitt, and Steve Carrel.

Christian Bale plays Michael Burry, the eccentric hedge fund manager who saw the housing bubble well before Wall Street did and he was betting big that it would burst - hence "The Big Short." He noticed the problem in March of 2005 and gets the ball rolling on a short position and then he has to convince investors. He's right of course, but he's early. So early that the investors are losing money while these mortgage back securities just continue to rise. The investors start to whine and they want their money out of his fund. He tries to convince them to hang in there, knowing it can't go on forever. It becomes a long and painful wait on a bet that should be a sure thing.

Well, we all know what happened in 2008 when these investments did eventually blow up, but it took two and a half years for the market to finally peak. He eventually made a fortune on this trade, and even though we know the lesson that sometimes you have to be right and sit tight while the market takes it's time unwinding the extremes, it's not a not always a fun place to be in the interim. In these cases it's probably better to be early than to be late, but that doesn't make it any easier while in that waiting period.




Does the market start falling today? Next month? Next year? Who knows? But I do think that the October highs may have been "the" high for the S&P 500 bull market, despite the fact that we did get an official bear market at the December lows. I just don't think it's quite over yet. You can see in the chart above that we had a rally of 12% in mid-2008 before things really went bad. So far the S&P has rallied 13% this year, and that's 15% since the December lows. By the way, the NYSE broader index actually peaked in January 2018 - not in October.

Why do I think stocks are overvalued? Using John Hussman's margin adjusted price / earnings ratio, the market is now as overvalued as any time in the last century...


Chart provided courtesy of www.hussmanfunds.com


I don't mind being a buyer in a bear market after stocks have become oversold and / or undervalued, but the buy low, sell high investor in me tells me this is closer to the sell high point than being a FOMO buyer after an extended rally.


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The S&P 500 (C-fund) rallied sharply early Tuesday, but gave back the gains by the close. It rallied back late from the lows and that created a spinning top candlestick, which can be a reversal pattern. The index is right in the middle of the wider rising trading channel (blue) while in a small rising channel (red dashed) since the breakout. Watch that old breakout level near 2815 for clues. I think if this rally is going to hold, that level cannot fail again.




The DWCPF (S-fund) had a bad day after rallying nicely on Monday. There's some resistance overhead but right now the immediate issue here was yesterday's negative reversal. If it can get by that I would think it could get over that resistance. But let's see it ignore the negative reversal first.




The Dow Transportation Index posted a negative outside reversal day yesterday where the day's high and low were outside of Monday's range, and it closed near the lows. That's usually a bad sign going forward and with FedEx and UPS trading lower in after hours, it may set up more selling early today, but we'll have to see how it reacts the support from the 50-day EMA (purple.)




The EFA (I-fund) was up on the day but it may be misleading with U.S. stocks giving up their gains after the overseas markets closed.

The AGG (F-fund) was down slightly and yields were up slightly. We keep thinking that a move to the lower end of the rising channel could spook stocks.




Why? Because if yields get a bounce off what could be a double bottom, then the stock market may have some competition for returns.




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

Tom Crowley


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