TSP Talk Blog

Stocks continued their slide on Friday after the progressive Mexican tariff plan was announcement. The indices opened lower and fought back for a few hours before things went south in afternoon trading and into the close. The Dow lost 355-points while the S&P 500 closed below the 200-day EMA for the first time since February.

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The market had obviously been in a bad way for weeks, but the new threat of tariffs on Mexico gave investors a reason to take the selling to a new level, literally, as we saw some key levels of support taken out last week. Yes, the Mexican tariffs was a trigger, but in reality the charts have been setting up for a pullback like this for many months. The question is, how much more severe will it get, or the worst almost over?




We had been watching things like the price of copper wobbling for a couple of months before that May 1 sell-off where it broke below the 200-day EMA. In hindsight it looks like it was the canary in the coal mine since that was the day stocks peaked.




There may be more emotional selling on Monday morning from mom and pop investors who read their Sunday papers and saw what was happening, but at this point we'd be looking for some kind of short-term relief rally, and it may be triggered by something along the lines of another Tweet from President Trump backing off on the tariffs threat, or perhaps even a resolution or alternative. But again, the charts are not looking great and the rallies could easily be sold, just like we saw a couple of times during the 2018 pullbacks / corrections. I am concerned that the 2800 area on the S&P was strong resistance during those 2018 corrections, and now the S&P is back below that level, so it could be a rally stopper if we do see a rebound.

Calling for a relief rally is easier said than done because market momentum can be tough to turn. The market always seems to move in one direction longer than seems reasonable, or probable. We saw that in the rally to start this year, and this 6-week losing streak in the Dow seems overdone - without some relief - but you never know how long the new trend will last. The market is most vulnerable during these periods so risks are rising, but for those willing to take the risk "sometimes" the reward is worth it. Often the biggest rallies come during bearish markets, and they can be swift and explosive, and it you wait too long you could miss it, but you also need to be nimble.

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The S&P 500 (C-fund) lost 1.32% on Friday capping off another bad week for stocks. The recent losing streak has taken the index to about where it was after that explosive 5-week rally to start the year, so it has erased all of the gains we've seen since that first week in February. It's now below the 200-day EMA and I'll be looking for at least 3 closes below it to confirm the breakdown.




The DWCPF (S-fund) actually held up better than the large caps for a change, and that spinning top candlestick could be a sign that the selling is getting a little overdone. A pop back up to the 200-day average wouldn't be a surprise at this point, but we've seen some key support levels taken out so it is certainly still vulnerable.




The EFA (I-fund) was helped by a drop in the dollar on Friday and it found a place to rebound after it hit some decent support at the March low and the bottom of the current descending channel. Can it get a trip back to the top of that channel this week?




The price of oil was hit yet again, falling another 5% on Friday, as it continues to price in an economic slowdown.




The High Yield Corporate Bond Fund is a major concern. It's in a new descending channel off the May 1 high, and it has now closed below the 50-day EMA for 5 straight days. We could see a bounce off the bottom of that channel but if this doesn't improve soon, the stock market could have a tough time this summer.




The yield on the 10-year Treasury plummeted yet again on Friday, pushing bond prices and the F-fund to new highs. Rather than taking a breather as we suspected it might at the 109.75 area, it has put it to another gear but it did back off from the top of that large parallel channel on Friday.




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

Tom Crowley


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