TSP Talk Blog

Stocks took a turn for the worse on Friday as investors seemed reluctant to want to hold into the weekend while the coronavirus numbers continue to to rise. The Dow dropped 603-points, and while the dip buyers were there on Thursday to buy the morning dip, they stayed on the sidelines on Friday and watched stocks decline all day without making a move.

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The Chinese stock market was closed all last week and will likely open up on Monday with some deep losses, and the question is whether the U.S. market will react negatively to it, or has it already done so? My guess is the U.S. stocks futures will react negatively on Sunday night (I'm writing this on Sunday morning) but sometimes emotional Monday morning opens can get reversed quickly. It will be a good tell for how serious investors believe this coronavirus situation is.

There's an interesting dichotomy for stocks when we start seeing 1% moves regularly. The chances of a snap back rally get higher, but also 3% declines can become 5% - 10% declines in a blink of an eye. If you've been on the sidelines waiting to get in, being early can be costly, as can being late, but trying to pick the day it turns is more luck than anything.

I have a bunch of charts to show you below, and while it won't predict the day this decline ends, it may help put some pieces together to help you make a better guess. Being patient doesn't cost you money, but some folks just hate to miss a rally, while others believe preserving the capital they have is more important. It could depend on your investment horizon.

Here's a few miscellaneous things we're watching outside of stocks:

For one, the 3-month / 10 year bond yield curve inverted again last week. That is, the yield on the 3-month bond is paying more than the yield on the 1--year. That's a red flag and this coronavirus outbreak isn't helping.






The yield on the 10-year Treasury is down near 1.5% again, which is an area that gets the stock market's attention. Prior dips in this area have preceded lows in the S&P 500 but the prior times, in the summer and fall, the S&P 500 was also testing, and finding support from, the 200-day EMA. Today it is a long way down.




Our friends at SentimenTrader.com tell us that we've now had Hindenburg Omen warnings in all four of the major U.S. indices, and that hasn't been a great short or long term sign for the market going forward.


Chart provided courtesy of www.sentimentrader.com


Despite this warning, as you'll see in the charts below many of the indices are testing the key 50-day EMA, a place where many pullbacks come to an end. There's no guarantees that the 50-EMAs will hold, but if they do break we'll look for the next logical downside target and go from there, watching for a high volume positive reversal. Some of those high volume reversals produce market bottoms, and some are just high probability short-term buying opportunities that may need to be sold later. We just have to put the pieces together while we watch it unfold.

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The S&P 500 (C-fund) took a nearly 2% hit on Friday as the rising trading channel broke again, but so far the 50-day EMA has held. In a bull market we'd expect the 50-day EMA to hold, but an occasional refresher after a big run can push it all the way to the 200-day EMA where the bull market status gets tested. Right now the bulls are looking for the 50-day EMA to be the springboard while the bears will be pushing for that 200-day EMA test, which is a long way down.




The weekly charts show some positives, and some concerns. There seems to be some support in the 3200 area, and then 3100, meaning this could be over soon, if not already...




But a longer-term view shows a much wider trading channel which is bullish, but there's a lot of room on the downside if it wants to test the bottom of the channel down near 3000 to 2950.




The DWCPF (S-fund) broke below its rising trading channel, which is a major red flag, but like the S&P, the 50-day EMA is equally important and could potentially contain this decline. An Asian market sell-off could trigger a breakdown on Monday morning and at that point we'd look for a high volume positive reversal, or a test of the 200-day EMA. However, whether any Monday morning emotional sell-off gets bought later in the day is the key.




The Dow Transportation Index lost a whopping 2.5% on Friday and closed below the 200-day EMA, which is surprising considering how strong the market in general has been for the last nearly 4 months. It's possible that it is holding at the bottom of a parallel trading channel (red).




The EFA (I-fund) looks weak after gaping down and falling meaningfully below the 50-day EMA, but like the Transports above, it is testing a possible parallel channel support line now.




The price of oil and copper continue to slide precipitously, which isn't a great sign for the economy, but both are now nearing levels that could produce some support - levels that held back in the fall.




The AGG (bonds / F-fund) continues its climb as those bond yields fall, and despite being extended here, investors could very well keep buying bonds if the stock market continues to fall. But whatever happens in the short-term those dropping yields are telling us that the economy may be weakening. That doesn't happen for no reason.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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

Tom Crowley


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