TSP Talk Blog

Like IBM on Thursday, another Dow component, Boeing, got clobbered on Friday pulling that index down nearly 1%, while percentage-wise most of the other major indices, including the S&P 500, small caps, and the I-fund, lost less than a half of a percent on the day. In the case of the Transportation index, it led again and closed in positive territory. So the 256-point loss in the Dow looked a little scarier than the broader market really acted, since Boeing accounted for about 170 of that 256 Dow point lost.

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The issue with IBM was earnings related, and that is a concern, but in the case of Boeing it was an internal issue that would not indicate any problems with the economy or other companies. Apparently they withheld information from the FAA in their investigation regarding the safety of their 737 Max jet.

Despite the losses on Friday the C, S, and I stock funds were up 0.55%, 0.68%, 1.25% respectively for the week, but it did feel like the momentum was slowing some. That slowing seems to be at a point that could be one of a couple of things... Either investors are getting nervous and doing things like selling late on Friday to avoid bad news headlines over the weekend, in which case that would be a good thing as markets tend to climb a wall of worry. Or, the market action is deteriorating and completing a long market top that has been in progress for nearly two years now.

The problem with that one is that bull markets don't tend to end with a two year consolidation that turns out to be a peak. I heard Mike Santoli mention this on CNBC the other day, so I took a look at some of the older bear market charts and it seems we are more likely to see another push higher to pull more people into stocks before the market eventually peaks. There's only a few major bear markets to view as a sample over the past 35 years, but it seems it would be fairly out of the ordinary to see those who have been bearish for the past two years looking for a top to have had that many opportunities to sell near the highs - in the case of the Dow up near the 27,000 area.



... and for the S&P 500, the 2900 - 3000 area.




At the beginning of the prior bear markets, the S&P 500 was leaping toward new highs before the bull market comes to an end. In 2006 and 2007 we got another strong push higher, after some sideways action from mid-2004 and mid-2006, which led to a peak.




In 2000 we saw a fairly abrupt peak after a huge rally in the late 90's - no sideways long-term consolidations near the top.




And prior to those came the 1987 market top where we saw a quick 35% bear market loss that came on the heels of an explosive rally where people were feeling really good about the stock market.




That kind of last push higher before the peaks pulls in the most investors, even the holdovers, to the bullish side as they enjoy the ride and believe gains are easy to come by and feel like they'll never end. That is opposed to the current two years of trying to call a top in a consolidating market where the AAII sentiment survey has been getting more folks saying they were bearish than bullish. That is not usually the recipe for a top.

I'd like to think that the technical analysis is telling the story, and the forces at work that can shake things up are all coming out in the charts first, such as the upcoming earnings season, the October 31 FOMC meeting and another possible interest rate cut, the trade war optimism that can always turn into a let down, and Brexit, which was looking good last week but has been hitting a few snags. So I won't rule anything out, but right now I think the charts are trying to tell us that, not so much that it will be an easy road, but that we could see higher prices by the end of the year no matter how rocky the road may be to get there.

As our TSP Talk Plus subscribers know I almost always take our trading system's buy / sell signals over my own personal analysis or opinions, although sometimes the chart formations (like double tops or open gaps that need filled, etc.) or impending news (FOMC meetings, jobs reports, etc.) can override them to some degree. I hope that they coincide, but not always.

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The S&P 500 (C-fund) moved down sharply on Friday but by midday we did see some buying and the index closed off the lows and back above that rising support line off those lows. That's a plus, but that gap is still open near 2950 and we have to consider that being filled as a short-term possibility. Despite the S&P flirting with new all-time highs again, we are seeing a little more pessimism than you might expect under these circumstances. That's the "wall of worry" I mentioned above, and that tells me that new highs are the "pain trade", meaning most people aren't positioned for a move to new highs. According to Investopedia, the "pain trade" is the tendency of markets to deliver the maximum amount of punishment to the most investors from time to time.




The S-fund managed to climb back above the 50 and 200-day EMAs last week, and while this chart is still has some technical issues, that is a good start towards improvement. There is some descending resistance overhead but that is still 1 or 2% above Friday's closing price.




The Dow Transportation Index has been the surprise lately. It has been in a trading range between 9700 and about 10,850 and it may be trying to make its way back to the top of that range, if it can get past the top of that open gap just above 10,600. There is also a large open gap down by 10,100 making a breakout above the range a little tough on this go round. But again, triple tops are not as common as double tops.




The EFA (I-fund) has made a large cup and handle formation, which do tend to breakout, but I really wish it had filled that open gap before getting to this point because backing and filling it always remains a possibility, breakout or not.




The 90-day / 10-year yield curve is no longer inverted but the damage has been done. Despite the fact that stocks could still rally in the short to intermediate-term, that inversion was a sign that a recession is still a very good possibility over the next year or so. But a future recession does not mean we can't have higher stock market prices in the interim. It's not uncommon.




AGG (bonds) has been finding decent support at the 50-day moving average and that rising blue support line, but if it can't start to jump off of those support levels, it risks forming a bear flag and they tend to break down. So bonds need to make a move soon, or it could become too late.




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

Tom Crowley


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