TSP Talk Blog

That's one way to start a new year... a sharp spike up on day one, followed by an almost equivalent turn down on day two. The Dow lost 234-points, or 0.8%, and the S&P and Nasdaq saw similar losses. Small caps held up a little better while the I-fund seems to have been given a favorable price since the EFA was down 1.2%. That may get adjusted today.

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The airstrike against an Iranian commander sent stocks reeling to start the day on Friday, but it became quickly clear that there was still a bid under the market as we saw the downside stabilize after the initial drop. After an early afternoon rally, there was some selling again into the close, and that makes sense given the volatile and uncertain situation in the Middle East.

Technically, there was no real damage done yet since the losses weren't even enough to erase Thursday's gains. We are at the tail end of the Santa Claus rally and that positive bias starts to change some after today based on the January seasonality calendar.


Chart provided courtesy of www.sentimentrader.com


The selling in stocks was one thing and the geopolitical event was a good reason for some profit taking, but what may have been more meaningful was the rally in bonds and decline in yields. The yield on the 10-year Treasury Note fell below 1.8% and also dropped below the 50-day EMA. It ended the day on Friday testing the rising support line.




The longer-term chart shows a possible large bear flag flirting with a breakdown after failing at the 200-day EMA last month.




Of course bonds and the F-fund do well when yields are falling and the reason this is significant is that we haven't really seen investors move to safety on recent market dips. But a breakdown in yields could mean the bond market, generally a more savvy group of traders and investors, may be trying to tell us that something more foreboding is coming.

It's a little early to say because those yields could hold at the support line / bottom of the flag, and bonds could pull back down, and that could send more money into the stocks market, so this is something I'll be watching this week - whether the rally in bonds is for real, or if it is just a temporary run to safety triggered by the geopolitical event?
The December Jobs Report will be released on Friday and estimates are looking for a gain of about 160,000 jobs, and an unemployment rate of 3.5%

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The S&P 500 (C-fund) backed off from those all time highs after the headline driven sell-off. I keep drawing that middle rising trendline (red dashed line) because it still seems to be relevant. On Friday the S&P closed below that line for the first time in about 3-weeks. The last time it fell below, we got that lower support line drawn at that December 3rd reversal day low. Now that lower support line could be the initial downside target (~3180) if we don't see an imminent bounce back.




The DWCPF (S-fund) fell sharply early, hit that lower rising support line and found support, bouncing off it and closing well off the lows. So far so good here, and 1500 looks to be the immediate critical support area.




The EFA (I-fund) had a rough day although as I mentioned in that first paragraph, the I-fund price didn't exactly match the EFA loss so it will be interesting to see where they price it today. The dollar has rebounded recently and that will put pressure on the I-fund.




The High Yield Corporate Bond Fund is still near the highs and this may be a sign that the stock market is still fine, but if you follow credit default swaps, the spread between the two may be telling a different story.




They are at multi-year lows and could be a warning sign, as it was before recent market declines.

Chart provided courtesy of www.sentimentrader.com


The AGG (F-fund / bonds) had a big day and it may have been a knee-jerk reaction to the airstrike in the Middle east, but the chart has been indicating a more bullish scenario for bonds for a while now. Why? I don't know, but that bull flag took two months to form and perhaps the lower yields are an indication of an economic slowdown. Perhaps not a recession as many experts have given up on that idea, but a slowdown is still very possible.




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

Tom Crowley


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