TSP Talk Blog

The stock market rebounded strongly on another Turnaround Tuesday, but we've been waiting more than a month now for the market to be able to put together two positive days in a row. Losses the day after a big gain have been dramatic all month, so the bulls have their work cut out for them today.

As has been routine recently, after the market closed yesterday with those large gains, the futures traders took a good chunk out of the gains in the after hours trading. Secretary of Treasury Steve Mnuchin warned on Tuesday evening that the unemployment rate could hit 20% if the government doesn't stimulate the economy. So, it looks like a here we go again situation.

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The market is battered and bruised, and in this kind of technical environment, it doesn't tend to jump right back with a "V" bottom reversal. We did see that rare occurrence in late 2019 but that decline was more Fed driven where this one more fear driven. That could mean a different type of recovery than we're used to as well.

It felt like the decline back in 2008 was worse for the stock market than what's happening today with banks and brokerage houses going out of business, and a near collapse of the financial system in 2008. This is not fun, but it's not the same. In this situation, time may be the key as this virus may get contained and the economic fall-out may only impact a quarter or two - hopefully. But it's that uncertainty that made this decline so violent with 14 months of gains being evaporated in less than a month.




... where as the decline in 2008 took more than a year to play out from top to bottom. It's not shown but we didn't revisit those old highs again until April 2013.




The 1987 market crash wiped out 20 months of gains in just a few weeks, then took almost two years to make a new high.




As I said, there will be economic fallout here obviously, but if the coronavirus is contained in a reasonable amount of time - Weeks? Months? More? - then perhaps we won't have as long of a wait before we see a full recovery. Despite going through a near 20% decline in late 2018, the S&P 500 recovered that loss in about 4 months.

One caveat to the current situation is that this market was in need of a cleansing after a that relentless rally from the December 2018 low until the recent peak in February. The coronavirus may have been the catalyst, but if that didn't come along, something else may have.

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The S&P 500 (C-fund) was up sharply, although only recovered about half of Monday's losses. It also remained in the sharply descending trading channel, which it will obviously have to break to put in a meaningful relief rally. The 50-day EMA hasn't quite crossed the 200-day EMA yet and while a crossover would generally a bearish sign for the intermediate-term, it has been my experience that when we do see these cross, an oversold short-term relief rally often occurs. It is so far below its moving averages now that it may be a surprise to how big of a relief rally we could see, although you'd never think that would be possible knowing what's going on around us.




The DWCPF (S-fund) put in another positive reversal day, but the bears have made a mockery out of positive reversal days this month. The 50-day / 200-day crossover hasn't produced much of a bounce yet, so we'll have to see if the market can finally put together a couple of positive days in a row, or if this impossibly negative trend continues.




The dollar has been rallying hard since its giant positive reversal last week. It has been why gold has not been rallying the way you might expect during this crisis. The strength in the dollar should also be putting some pressure on the I-fund but the I-fund has actually hung in there pretty well with the U.S. indices, considering. But that was likely because of the dramatic losses the dollar took to start the month.




The yield on the 10-Year Treasury moved back above 1% yesterday - at least it was trading there after hours at 1.07%, and that's a decent sign. The economic stimulus talk is helping that situation, but the chart may be in the process of creating a big bearish looking flag that could easily flip back over.




The AGG (bonds / F-fund) is also creating a bear flag, ironically. Ironic because bonds tend to move counter to yields. The difference is that the bear flag in the AGG is only 7 days old, where the bear flag on the 10-year treasury started a month ago. The AGG may be trying to find a bottom here, but the bear flag isn't too comforting.




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

Tom Crowley



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