TSP Talk Blog

Stocks rallied early but faded late, possibly triggered by President Trump's message that he would be giving a news conference Friday regarding China. That is a story we figured would get the market's attention at some point. The Dow lost 148-points and the S&P 500 gave up a 1.1% earlier gain to close down modestly. Bonds were down, and the I-fund was up on a weak dollar and the early strength in the U.S. market.

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There was actually a pretty good sized bounce right after the bell yesterday taking the S&P 500 futures back into slightly positive territory, and pushing the Nasdaq 100 futures up about 40 points during that hour of trading after the closing bell.

Initial jobless claims came in at 2.1 million for the week, and first quarter GDP was updated to negative 5.0%. Small caps took the heat yesterday as the Russell 2000 turned an early 1% gain into a nasty 2.5% loss. The S-fund seems to be balking at the 200-day SMA (simple average), which is just above the 200-day EMA.




I know you must be tired of hearing this, but we have to remain cognizant that we are still in a bear market rally, despite the fact that it doesn't look or feel like it right now. The charts from the 2008 and 2001 bear markets I post below show just how good things look and feel after a big rally in a bear market.

It's debatable whether we still are in a bear market and by many measures, including the 200-day EMA, many people believe the bear is gone, and it may be, but again in 2008 we saw big rally off the lows that lasted nine weeks before the bear market rally ran out of steam. Here's the before, during, and after for just one of the 2008 bear market rallies...



And here is a before, during, and after for a 2001 bear market rally.




I do notice how strong the market was just before the peaks were in, and also both of these failed at key moving averages, which were just recently surpassed recently in the current S&P 500 chart, and that's the way things used to work. These days with program and high frequency trading, we tend to see trends get pushed further by the digital buying and selling, and I believe it pushed the average investor to not only hold on longer, but to also bring those from the other side to reluctantly jump into the trend, until the rubber band finally snaps. Not that we will necessarily see lower lows or even a test of the lows, but the S&P 500 has rallied over 33% in a couple of months, and that rubber band may be fraying.

Below we'll look at the situation with China and their market and why we my need to be concerned. As I mentioned, Trump will be having a news conference today on the U.S. - China relations.

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The S&P 500 (C-fund) remains in a ascending trend as the rally off the lows is now two months old, and if the bears have any plans to push the indices lower, time may be running out for them as far as historical bear market rallies go. Otherwise, this chart has passed some key resistance levels, without filling three major open gaps below and the bulls look to be in charge unless something changes rather quickly.




And what could change quickly at this point? Perhaps our relationship with China as the origins of the virus are being studied, and the volatile situation in Hong Kong. Since the breakdown in the Shanghai Index last week, we've seen a small bounce back that looks very much like a bear flag forming under the 50-day EMA. This isn't a great looking chart now, but why does that matter to us?




Remember when COVID-19 cases were propagating in China earlier in the year? Their stock market started to tumble in January of this year and the S&P 500 basically ignored it as it was rallying up to new highs for another month. Perhaps because our markets weren't falling, the Shanghai Index rallied back pretty strongly before tumbling again, and this time it took the U.S. markets with it. So, if the Shanghai Index starts wobbling again, it could be the canary in the coalmine for our market.




The Dow Transportation Index exploded this week as airline stocks got some positive news but you can see that it raced up to the top of the rising trading channel, and stalled. It also remains below the key 200-day EMA.




The EFA (I-fund) had a good day yesterday with much of that having to do with the sell-off in the dollar, plus the late selling in U.S. stocks were not priced into the overseas markets yet.




The BND (F-fund) was down early yesterday but rebounded when stocks gave up their early gains. Since the bond market closes an hour before the stock market, the F-fund price may not reflect some of that late buying in bonds. BND closed just above that rising support line, which it fell through earlier in the day, and it is still below that breakout line, so as of now it is still a failed breakout.




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Thanks for reading. Have a great weekend!

Tom Crowley


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