TSP Talk Blog

It was another crazy day on Wall Street on Friday, and when the VIX is hitting 50, the swings will be head spinning. The Dow was down another 1000-points at the lows of the day, and it was moving 200 - 600 points several times an hour. Intraday rallies were being swatted down, but the final push higher was saved by the bell and the indices closed near the highs of the day, despite the losses in many of them. The Nasdaq actually closed with a green number.

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The rally actually kept going after bell in the futures market and the S&P futures ended the day in positive territory, along with the Nasdaq.




However, the Sunday evening futures opened down sharply again. Normally a positive reversal on a Friday brings more buying on a Monday, but the news over the weekend didn't ease any of the concerns of the spread of the COVID-19 so Friday's reversal may be in jeopardy. But high volume reversals tend to put in a temporary floor with the theory being that, if you are looking to sell and didn't sell on the panic days, when would you be selling? Those still in are either in for the long haul, or waiting for a relief rally to sell. I wouldn't be surprised if we saw green numbers by the close today, but that doesn't mean the coast is clear.

As we've been talking about for weeks, if not longer, we were seeing warning signs all over, but the market continued to move relentlessly higher and it was getting more difficult to trust them. The boy who cried wolf cried too many times. We had the yield curve inversion last year and it re-inverted again recently. The price of oil and copper were diving. The safety trades of bonds and gold were rallying. We had several negative divergences in our indicators, as our TSP Talk Plus subscribers probably got sick of hearing about. But stocks kept moving higher, until...




Unfortunately this has become politicized. Half this country doesn't believe a word that President Trump says, and the other half doesn't believe what the media are telling them. Where does that leave us as investors?

Is the coronavirus something that can take down the global economy, as some suggest? Should the market be falling at a rate commensurate with what we saw at the depths of the financial crisis in 2008 where banks and brokerage houses were failing, the unemployment rate doubled, and people lost their houses? Momentum is a powerful thing and just as stocks went up much further than seemed reasonable, they could also go down a lot further then we'd expect, as it may have already.

There has been technical damage done to the charts and the virus is initiating what was probably an overdue correction of the relentless rally that started in December of 2018. Since 1900 the U.S. stock market has averaged 10% corrections about once per year, so thus far this is inline with typical averages. Perhaps this is just an opportunity for the market to initiate the bursting of the inflated debt and equities bubbles that many have talked about.

"Buy when there's blood in the streets, even if the blood is your own." -- Baron Rothschild

The character of the market has changed. We should get a snap back rally, and it could be explosive, but unlike early 2019, it probably won't be a "V" bottom unless we see news of a vaccine or something. Volatility will remain high so you probably won't feel comfortable no matter what you do, whether watching an explosive rally from the sidelines, or retesting the lows after you thought the worst was over, it's going to be intense.

Even a rate cut from the Fed doesn't really fix the problem, but it could put a Band-Aid on things temporarily. My suspicion is that, no matter how much of a bounce we see, we're likely to revisit whatever this initial low turns out to be - if it wasn't Friday's low. Stay nimble. There are opportunities in markets like this.

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The S&P 500 (C-fund) fell through the 50 and 200-day EMAs last week like a hot knife through butter. Friday's reversal looked promising, especially with 5 billion shares being traded, but we had a weekend of coronavirus news stirring more emotions, and we may not get rational responses. We do have three large open gaps on the chart that will look to get filled, but it will have to break above that sharply descending resistance line first before filling any of them.




The weekly chart shows another view of just how extreme the move was last week. It fell below one level of support but closed just above it. We also got a very rare open gap on the weekly chart.




Here's a much longer term weekly chart highlighted the high trading volume which compared to similar levels near other meaningful lows. The financial crisis trading was on another level altogether.




The High Yield Corporate Bond Fund managed to close higher on Friday after a major positive reversal, and it closed above the 200-day EMA after falling below it earlier in the day. Ugly chart. Promising reversal.




The Volatility Index nearly hit 50 on Friday before reversing and closing at 40.




The AGG (bonds / F-fund) had a big day on Friday as bonds continue to get extended. An argument could be made that they have become overly extended and if stocks do get a snap back rally, we could see a lot of profit taking in bonds.




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

Tom Crowley



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