TSP Talk Blog

Stocks opened lower on Friday after China announced more tariffs on the U.S., but the Fed calmed investors at Jackson Hole and we actually saw green by late morning trading. Then came the tweet by President Trump regarding U.S. companies doing business with China, and more on tariffs, as we'll talk about below. It turned into a sell-fest the rest of the day, except for some very late buying just before the bell. By the close the Dow had lost 623-points. Bonds, which had shown signs of a slowdown on Thursday, were revitalized by the trade war news on Friday.

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This headline and tweet driven market can be advantageous to traders who can act quickly, but otherwise it has become frustrating for those of us in the TSP with noon trading deadlines, and with only 2 transfers allotted each month, it is very difficult to negotiate through the volatility.

Here's the tweet from Trump that came out at the market highs on Friday.
"Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA."

And then, "I will be responding to China’s Tariffs this afternoon."

The second part may have had as much impact as the first as investors were running for the exits before that upcoming response, which turned out to be adding additional tariffs on China, in retaliation to their retaliation. And the war continues.

If you decided to sell for TSP stock funds on Friday morning (before the deadline) while stocks were rallying and while the S&P 500 was testing the top of the bear flag we saw on the chart, you were screwed, for lack of a better term. You took the losses.

Jerome Powell is not cutting rates fast enough for President Trump and the timing of the above tweets made it appear that he may not have appreciated stocks rallying after Powell's speech in Jackson Hole on Friday, without more concrete assurances of more cuts. That's speculation on my part, and possibly just frustration because I feel like I've been burned a few too many times by these tweets while trying to time this market. Of course I may have felt differently if I was in the F or G-fund on Friday, but instead Friday's tweet turned into a 5 figure loss for me. That said, the S&P 500 chart has been forming a bear flag, and Trump may have just hastened its full development.

Here's that bear flag and you can see, after the Powell speech, the top of the flag was flirting with a breakout above the 50-day EMA, which isn't always easy to recapture, but the tweet sent the S&P right back to the bottom of the flag, wiping out a week's worth of gains. It closed precariously at the bottom of that flag and right on top of the 200-day EMA, but right at levels that have held before, so Monday's action should be very, very interesting. I would almost say that we could get the start of a bear market with a breakdown, or another reprieve if the 200-day EMA holds again.




So, if the bear flag does breakdown, it could be the gong that triggers the next major decline. There are still good arguments for and against that happening, but with the S&P 500 now down 6% from all-time highs, would be it be too late to sell if you are in? Well, no one knows how this plays out, but let's say this does trigger another bear market. Here's what the first 6% pullback turned into during the start of the 2008 - 2009 bear market.



I'm writing this over the weekend and it may be too early to figure out how investors will react when the futures market opens up on Sunday evening because you never know what will be tweeted or hit the wire in the interim. The Sunday shows didn't exactly smooth over the situation, and if anything doubled down on their desire to get tough with China, although they did try to play down the ordering of U.S. companies to look for alternative to doing business with China.

There is a lot of time for something to change before Monday's opening bell. Some positive news and this could snap back off the bottom of that flag. More negative trade war news, or even no news, could have mom and pop selling on Monday after reading their Sunday papers, and that bear flag will break down. Yet another emotional Monday morning open likely coming.

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The S&P 500 (C-fund) is in that bear flag that we pointed out above, and that makes it vulnerable to a breakdown, but this current area, at the 200-day EMA, has held repeatedly. I always say, if you keep knocking eventually someone is going to let you in, and this chart shows repeated knocking on not only the support of the 200-day EMA, but also at the resistance of the top of the flag and the 50-day EMA. One good thing about Friday's sell-off is that both of the open gaps in the flag are now filled so the bulls don't have to worry about those anymore. Sometimes that is all that is needed to appease the downside. That said, this is still a bear flag and they do have a good tendency to breakdown.




The S-fund also fell to the bottom of a bearish looking flag, and the chart is also approaching some potential rising support of the early June low. This one has been below the 200-day EMA for a while and that makes it much more vulnerable. It has been lagging and is looking very precarious so that support looks very critical.




I posted this chart in the forum about 10 minutes before the Trump tweet, extolling the recent strength and new highs we were seeing in this credit market ETF.




10 minutes later and this is what we were seeing. A failed breakout and a negative outside reversal, although it was enough to fill an open gap, which I always like to see. There is another open gap near the 50-day EMA so that's another potential target.




The I-fund withstood the selling better than U.S. stocks because the dollar fell hard on the trade war related news, and the negative outside reversal day might indicate that there is some more short-term weakness to come - barring any change in the trade war news.




The Dow Transportation Index took a big hit as the Trump tweet about companies doing business in China hit airlines hard, and also UPS and FedEx took big hits. The lows from June and earlier this month, are being tested now.




AGG (F-fund / bonds) had fallen back into the rising trading channel, and we expected that we could see a little more pullback, which could help stocks, but again the Trump tweets reversed everything that was developing.





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

Tom Crowley



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