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TSP Talk Market Commentary 03/04/2020

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Stocks took another wild ride on Tuesday, smacking back much of Monday's record breaking gains. The Dow lost 786-points so clearly the volatility is still here. We saw a sharp spike higher after the Fed cut the Fed Funds interest rate by 0.50%, but that was short-lived, and if anything may have sparked more fears because of their concern.

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The market sold off on some initial profit taking after the 1300 point gain on Monday, but then the Fed stepped in and rather than everyone applauding - although the market did initially rally - the market sold off worrying that the Fed must think the coronavirus could be an economy burden.

The truth is, this is how corrections play out. We'll look at some charts and see that there is nothing unusual going on yet as far as how major sell-offs turn into snap back rallies, followed by tests of the lows. We've been down this road a couple of other times in the last two years, but it doesn't take the emotional aspect out of it while it is playing out.

The Fed was in a tough situation. Everyone was saying that the sky is falling, but then he cut rates and he's being accused of falling to political pressure. Maybe a rate cut won't cure the coronavirus, but clearly the market is bracing for an economic slowdown caused by the reaction to the coronavirus. And that's the Fed's job - to stimulate the economy when there are roadblocks. I just hope he raises them again when this blows over. The fact is Powell is the only Fed Chairman to actually raise rates in the last 16 years. Throughout Janet Yellen's term, she did not raised rates once. So my take is, the Fed did what they had to do. They were going to cut rates on March 11th anyway, at their FOMC meeting. Why wait with the markets in turmoil now?

That said, it didn't help the market yesterday, but looking at the charts, we can see what's happening. So far it looks a lot like the lows in 2018 when the trade war was kicking off.


And then, here's how it played out in February 2018 - a test of the lows, followed by a meaningful rebound...

And eventually another retest several weeks out which held, so the low in February did hold as the low.

Is this how it will play out this way? Obviously not exactly, but it's the same program trading and emotional reactions of fear and greed playing out so a similar formation is possible. Now the lows don't have to hold a few weeks out like they did in 2018, but for this round it feels like we've fallen enough and Friday's low is solid, although could be tested.

As we mentioned on Monday - before the big rally...

"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."

Some of you may have gotten lucky and played this just right. For the rest of you, have we described your feelings this week above?

I wasn't watching very closely and it could be a coincidence, but it looks like the futures started moving higher as the polls were closing across the country, and it looked like Joe Biden had done really well. We talked yesterday about how the market may not like Sanders winning big on Super Tuesday, and would be more relieved if Biden won. That could be what we're seeing as the futures are up fairly big Tuesday night.

I think I gave you enough charts to get the idea. I'll just add a couple more that are unrelated to the S&P 500 but one more thing about the Dow and S&P 500 -- They are still up 500 and 48 points respectively for the week.

The HYG High Yield Corporate Bond Fund exploded on Monday and actually moved above the 50-day EMA after the Fed rate cut, but it settled back down to close between the 50 and 200 EMAs.

Yields plummeted again and the yield on the 10-year treasury fell below 1% at one point yesterday. Incredible.

The AGG (bonds / F-fund) keeps going, feeding on investors' fears. There was a negative kangaroo tail created making it somewhat of a negative reversal, but right now technical analysis is being trumped by emotions.

Another one of the safety trades, gold, spiked on the rate cut and filled an open gap in the process on GLD. But by the close it was back below the descending resistance line.

The Volatility Index spiked but it actually didn't get as high as it did on Friday or Monday. 37 is nothing to be comfortable with. It means we should expect more swings testing our emotional fortitude.

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

Tom Crowley

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