TSP Talk Blog

Stocks were mixed but mostly higher on Friday, the lightest trading day since the pandemic sell-off started. It felt like holiday action, which tends to have a bullish bias, but last week's rally was a lot better than most positive holiday bias expectations. The Dow lost 9-points on the day but the broader indices did just fine.

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The I-fund lagged as the dollar rallied and most of the gains in the U.S. came later in the day when the overseas markets were closed. Bonds were up making it four straight positive days for the F-fund, which continues to be the best performing fund this year although those stock funds have come roaring back.

The futures were rallying over the weekend for some reason - businesses opening up, etc., I suppose, which is great news to most people, but my argument is that even when things do open up, it won't go back to "normal" for some time, so how can we expect stocks to go back near levels we saw when things were normal? And by the way, they were historically overvalued before the whole pandemic started so going back there wouldn't seem to make a whole lot of sense to me at all, but that's what seems to be happening - or trying to happen. The question is, do you invest based on hope and momentum, or logic and data?

Last week I mentioned the escalating tension between China and the U.S. as the term "cold war" gets thrown around recently. I can only imagine that it would be a negative catalyst for stocks if indeed we are heading in that direction.

The Chinese Shanghai Index is not part of our I-fund at this time, but I do keep an eye on it because of their place in the global economy, and I noticed on Friday it made a meaningful breakdown below its trading channel and the 50-day EMA after remaining in that rising trading channel for a couple of months. It was testing the resistance of the 200-day EMA for a couple of weeks and perhaps these new tensions with the U.S. may have scared investors, but this looks like typical bear market action. We just haven't seen it yet in the U.S. stock market.




There's no doubt that stocks have been quite resilient over the last two months. That rally was coming off one of the worst stretches for U.S. stocks ever with that dramatic one month 30% plus crash. Can they erase all of those losses in a grind higher off the lows without a retest, or even another hiccup? It seems unlikely, but I suppose anything is possible, and with the Fed ready to use any tool it has to keep the economy from a collapse, investors may be feeling a little invincible.

Only time will tell whether they're right to feel that way, or if they are about to be humbled. There are not a lot of historical precedents that would suggest a one way rise back to new highs, after a 30% decline, is the path of least resistance.

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The S&P 500 (C-fund) has been moving sideways for several days heading into the holiday weekend, and based on the futures prices on Monday, it may be looking to make a move out of that 2950 area that it has been stuck in. I normally use the exponential moving averages (EMAs) but many traders use the simple moving averages (MA or SMA) so when the charts are in that area it may be best to look at both. The S&P has been hovering just above the 200-day EMA for the last week, and just below the 200-day SMA. Friday saw the lightest trading volume day since before the pandemic sell off.




The weekly chart had the S&P 500 closing right on the top of the wide range we have been talking about for years now - the 2600 - 2950 area (blue), after briefly breaking above it. You can see that the range isn't exactly impenetrable. It's more of an area that it has fallen back to after moving to extremes above and below it for the last 2+ years. The red rising channel looks to be a very valid range that we may need to consider seriously as a possible upside target (currently 3100) but again, with what is going on in the country and the world, it seems difficult to believe that stocks would be trading at the upper range of anything for long. They've certainly outperformed my expectations, but getting back to extreme overvaluations seems unfathomable any time soon under the current circumstances. Yet, they're trying.




The DWCPF (S-fund) pushed up toward the April highs last week, and if the futures remains strong, it looks like we could see a test of the 200-day EMA early this week. The 200-day EMA is usually the upper end of any bear market rally so we'll see how it reacts. By the way, the 200-day SMA is not shown but it is currently 1371.




Our S-fund is actually a mix of small caps and midcaps, basically all of the U.S. publicly traded companies that are not in the S&P 500. But the Russell 2000 is "the" small cap index and the S-fund does take its cues from it. The Russell ETF is called IWM and it hasn't quite made a higher high over April's high yet, and it does have more room on the upside if it is going to test its 200-day EMA. The 200-day SMA is at 146.80. The recent drift higher looks familiar but the prior two similar blue arrow patterns gave us different results afterward - one up, one down.




The EFA (I-fund) pulled back in the latter half of last week, and that brought it down close to where it was in Mid-April, so it has been moving mostly sideways for more than a month. But clearly there is a rising trading channel (blue) and it looks like we could see a bounce off the 50-day EMA to start the week. However, like the S&P and the small caps indexes above, there are big gaps below that have gone unfilled, and could be pullback targets at some point.




The BND made another closing high on Friday and the F-fund is also closing in on its highest close, but you can see it is dealing with a possible double top in the short term.




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

Tom Crowley



Posted daily at TSP Talk - Market Commentary

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