TSP Talk Blog

Stocks opened on the downside Thursday, and sold off sharply during the first hour of trading before we saw buyers step in, creating a classic positive reversal day with the indices closing at the highs. The Dow gained 377-points and a 32.50 point gain in the S&P 500 is always impressive, but of course that's coming on the heals of a 60 and 50 point back to back losses, plus a loss of another 50+ to start the day on Thursday, so it was an impressive reversal off those lows, but the bulls need to see some follow-through today or early next week.

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The day started after another initial jobless claims report showing 3 million more people filed for first time unemployment benefits. The market, as it has been doing week after week, ignored it and rallied anyway. While the economy is certainly showing signs of starting to reopen, how can stocks continue to move higher if 3 million new people a week lose their jobs?

As we talked about yesterday, in March, when stocks were tumbling at an historic rate, there was a distinct pattern of seeing a big positive day in between a couple of really bad days. There was only one 3-day losing streak (Mar. 5, 6, 9) in March yet we saw steep double digit losses that month. So again, follow through will be the key here before the bulls can take momentum back after the steep two-day decline this week.




When you look at this chart below you can see that the S&P 500 has come a long way since the March lows. It's flirting with the 200-day EMA after breaking above the 50-day EMA, but it did come back down to fall below the rising support lines (red.) Is this a chart that you'd want to buy or sell? It looks like the bulls took over but the bears are starting to show some teeth.



OK, I fooled you. That was the chart of the first half of 2008, not 2020. It looks pretty similar and the same battle was likely going on between the bulls and the bears after a tremendous 2-month bear market rally. And of course, here's what happened next in the summer of 2008...




I'm not saying that is what is going to happen, but it is certainly possible and that's how bear markets usually work. We don't fall 30% then climb back to new highs a couple of months later as if nothing happened, while tens of millions of people have lost their jobs and are still losing them. According to the Federal reserve, nearly 40% of households with incomes below $40,000 have been laid off or furloughed.

In the short-term, anything can happen and as you saw in the charts above we could even see a break above the 200-day EMA just to shake out some bears, but the current environment just doesn't seem stable enough to sustain much more upside.

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The S&P 500 (C-fund) posted a huge positive reversal day on Thursday with it rallying 85 points from low to high on the day. It managed to close back above the 50-day EMA, although it is still below some key support lines - see the 2008 charts above for how dangerous that can be. The PMO indicator is rolling over and looks about ready to cross below its moving average (red) for the first time since late February.




The DWCPF (S-fund) posted a decent gain near 1% but it wasn't enough to recapture the resistance it faces. The next few trading days could be very telling.




The EFA (I-fund) closed down on the day with a lot of the gains in the U.S. coming well after the overseas markets had closed. I haven't talked about the dollar here much recently since its the virus and the economic recovery that has been the market mover, but as you can see, the I-fund is still quite impacted by the dollar with its inverse correlation.




The Dow Transportation Index posted a major positive reversal, and those candlestick formations are one the best short-term positive signs that we see, but short-term could mean a day or two, or even just an intraday upside follow-through. It would be impressive if this chart can get back above the 50-day EMA, which it has closed above only once since February, and back into the flag-like formation, although that is looking like a bear flag and I think it needs more help than a day or two rally.




The Financials had a big day gaining 2.6% on the day, and that seemed to be the focus with talk of Goldman Sachs eying a deal with Wells Fargo, which was up big yesterday. The daily chart looks nice with that big bullish candlestick, but this chart has already broken down, and because of that the path of least resistance may still be to the downside.




The BND / F-fund chart shows is testing the top of that flag again. Bull flags tend to break out. I thought this could break out in late April, but that didn't happen, although it is getting another chance here. Do or die time for bonds. The longer term chart also shows a large bullish looking cup and handle formation, but we'll see.




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Thanks for reading. Have a great weekend!

Tom Crowley



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