TSP Talk Blog

Stocks rallied about a half of a percent yesterday, but that doesn't tell the story of the last 24 hours or so. We saw a 500-point decline in the Dow futures after hours trading on Tuesday night. By the opening bell, the indices opened flat. From there the dip buyers used the reversal to trigger another rally, and the Dow was up nearly 300-points at Wednesday's highs. A sell off in the final 30-minutes cut those gains in half, but overall the bulls came out on top after the wild ride.

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The market celebrated the de-escalation of an airstrike against the U.S., that hadn't even happened the day before. That is, the airstrike in Iraq happened after the market closed on Tuesday. The overnight futures plunged on Tuesday night, but by Wednesday morning those losses were completely erased. Then, the market rallied on the news that there were no casualties and perhaps signaled that this incident is over and that there won't be a war.

In a bull market people seem to look for any excuse to buy stocks, and while we shouldn't be surprised that stocks are up in a bull market that has been relentless for months, the big gains on Wednesday triggered by a de-escalation of an incident that the market hadn't even had a chance to sell yet, seemed beyond irrational.

Perhaps the fact that we may have reason to believe that the events in Iraq are not going to lead to war, but that would mean trusting Iran. How much are you willing to risk on that assumption?

Now, here we are with stocks, not only at all time highs, but also with the S&P 500 more overvalued than ever before based on the price to sales ratio. Higher than 2008, and now even higher than the dot com bubble before it burst, per Ned Davis Research.


Chart source: www.ndr.com/


So, if you're sitting on the sidelines in disbelief of how much stocks are moving while you're missing out, or if you're in stocks and have made a ton of money over the last 11 months since the December 2018 low, you might want to take notice. Just like dot com bubble stocks that didn't any make money, or bitcoin, cannabis stocks, or meatless hamburger companies, eventually the party ends and reality kicks in.

Not that I necessarily thinks stocks are going to plunge in 2020. On the contrary, the longer term charts look quite compelling despite those overvaluations. But charts that go straight up can be very dangerous and there are better times to buy than at all-time highs - and worst times to sell. And just like those investors who were eventually panic selling the over-priced shares of bitcoin and meatless burger stocks when the prices started to free fall of their highs, there will be a better time to push the buy button down the road.

The selling in the final half hour of trading yesterday seemed to be triggered by reports of rocket fire in Bagdad, and with little information available at the time, investors decided to take a little off the table before the close.
The December Jobs Report will be released Friday morning 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) rallied throughout the day on Wednesday after what appears to have been an indication that war is not imminent despite Iran's response to the killing of Soleimani. That was quite a 24 hour period for the market and while it was a victory for the bulls in the end, there may be some technical issues here which we touched on the other day.




As I mentioned in Tuesday's commentary there was a stealth gap opened between last Thursday's close and the highs the following day on Friday.




We saw that gap get filled yesterday, which isn't a surprise, except for the fact that the S&P 500 futures were down 50 points on Tuesday night, yet they were able to reverse and rebound about 80 points to fill that gap.



After it was filled, we saw some program trading back off and move to the sell side, while mom and pop investors were likely buying the new high excitement and may have gotten themselves trapped, although that remains to be seen. Mom and pop buy and holders have done pretty well over the last year playing this game. But now there's a possible failed breakout formation formed, the bears may have been given another chance.


The DWCPF (S-fund) also poked its head above the recent highs, but backed off by the close.




The EFA / I-fund saw a similar gain, but as usual, the price may not always be reflective of what happened because most of the gains made in the U.S. markets happened after the overseas markets closed. The dollar was up sharply again and that will work against the I-fund.




Once again the Volatility Index spiked above the 200-day EMA before settling down again well below it.




The AGG (F-fund / bonds) were down after a strong open as they did the opposite of what stocks did. Nervous investors who were selling stocks and buying bonds near the open had to reverse course and sell bonds when the upside momentum shifted back into stocks.




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

Tom Crowley


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