TSP Talk Blog

Stocks took a dive on Monday over more concerns about the coronavirus spreading. The Dow lost 454-points with most indices losing 1% to 2% on the day. The Transportation Index was a big laggard as travel may be the first industry that gets hurt because of the virus. The I-fund took a hit despite some Asian markets being closed for a holiday. The safety trades of bonds and gold were up on the day.

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Will stocks snap right back as they have done repeatedly over the last year? It's very possible but I'd expect the market to watch the coronavirus cases and deaths numbers knowing that if this rises, the potential for more Chinese cities to shut down and restrict travel, plus everyday things like public transportation, sporting events, casinos, theaters, malls, or anything that normally attracts large crowds, may start feeling the effects of those who might choose to stay home instead.

Despite the death count around the world from this virus only being about as many people that get killed by lightening in the U.S. each year, it's the fear factor that plays a roll here. Fear of the unknown - i.e. let's stay home until we know more, and that's the kind of thing that can drag down the GDP.

Of course if the number of cases are contained and it doesn't start to spread, this could be a distant memory in no time. Scares like this tend to only be a short-term blip on the stock charts and that could mean a buying opportunity is near, if not upon us already. Believe me, very few people really know at this point, and anyone who thinks they know are guessing. But buying low and selling high still works, if you can figure out where low is and where high is.

By cutting rates aggressively the Fed may have slowed down what the inverted yield curve in 2019 was indicating, and that was a potential recession, since the prior 7 yield curve inversions led to recessions. Now that there could be more of an emergency with this new deadly coronavirus, they may have used a lot of their ammunition that they may need to fight a potentially more serious economic threat. Perhaps those first cuts did help, but if we do get a recession (as the inversion indicated) perhaps all they did was help tack onto an already bloated stock market that was doing fine on its own once they stopped cutting late in 2018. They do have about six 0.25% cuts available to them, but then we'd be back to the 2008 - 2016 0% interest rate world, which is not "normal" and only designed to expand bubbles - and bubbles eventually pop.

Yields dropped sharply again as the safety trade in bonds was working...




And gold rallied nearing the early January highs again.




And as we have been talking about, the potential economic fallout is still pulling down the price of oil and copper.




The futures were up modestly on Monday evening so we'll see if dip buyers are back, or if the shift has moved to selling rallies.

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The S&P 500 (C-fund) fell below the support line of the long narrow ascending trading channel, and that's always a warning sign, but a 3 to 5 day waiting period is usually a better indication if the trend has really broken. The index is still above the 50-day EMA, which is a plus, although we saw the market leading Transportation Index, as well as the I fund's EAFE Index, fall below theirs.




The DWCPF (S-fund) opened lower, fell below its rising support line, but stabilized above the 50-day EMA making this only partially problematic as far as technical analysis goes.




The Dow Transportation Index was the big loser because of the airlines and other economically sensitive companies in it. It broke below the 50-day EMA and whether it can recapture that in the coming days may set the tone for the market in general.




The EFA (I-fund) was hit hard and was also due for some give backs after Friday's over pricing, so it could be ugly (the price hasn't posted as of this writing). Technically, that's now two support lines taken out so this needs some immediate help. The dollar was up adding more pressure here, and that pushed the I-fund into negative territory for the new year.




The High Yield Corporate Bond fund had been showing some weakness of late and on Monday the 50-day EMA gave way. Prior breakdowns were short-lived so we have to cut it some slack for a few days to see if it can bounce right back like it did in October and November.




The AGG (bonds / F-fund) benefitted from the fear and made another new high. As far as bond rallies go, this one may be in need of a break in the short-term, unless the virus news gets worse. The F-fund is now the top returning TSP fund in January. Who had that in their office pool?




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

Tom Crowley



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