TSP Talk Blog

Stocks failed to follow through on Thursday positive reversal day, and instead rolled over and basically repeated Wednesday's 700+ point sell-off. Trading volume was elevated possibly suggesting it was another day of pension fund rebalancing. The Dow lost 730-points and the selling was broad, sparing few sectors. The charts are now testing some crucial support levels.

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Last week's action certainly brought up concerns, both fundamentally as far as COVID cases increase, and technically as we saw some cracks in the charts. Friday felt a lot like Wednesday where trading volume spiked up and that might have been an indication that there was more pension rebalancing going on, as we talked about last week. That is, because stocks performed so well in the 2nd quarter, these pension funds have to reallocate their accounts to their fund's prospectus allocations as we head into the 3rd quarter, because they had become top heavy in stocks due to the recent gains, thus they were selling stocks last week, and buying bonds. That should be close to over now, although we do have two more days left in the 2nd quarter.

The price of copper and lumber made new recent intraday highs on Friday, and oil is holding near its recent highs, and that gives some credibility to the pension selling theory rather than the economy showing signs of reverting back to slowing.

The charts are sitting on some very critical support lines that could make or break the next week or so. A crash, or serious tumble, from these chart formations would not be a complete surprise, but as we'll talk about below, there is also a setup for a bounce from here, especially if last week's selling was more account management (end of quarter fund rebalancing) than technical or fundamental selling.

This is an election year and if you know anything about what is going on, there is somewhere close to half of the country that would probably do or believe anything to see Donald Trump lose in November. There is also somewhere close to half of the country that would probably do or believe anything to see Donald Trump get reelected. We have to try to read in between the headlines to figure out what is real -- and how it will impact the stock market. We can have our personal political biases but when it comes to the market, the only thing that matters is what the market perceives to be true.

If you want the economy to crash because you don't want Trump to be reelected, then you may not be seeing all the good that is happening, and you won't have a clear vision. If you believe the economy is safe and out of danger because you want Trump to be reelected, then you probably aren't seeing all the actual obstacles that are still before us and the economy, and you won't have a clear vision. Most of us have some kind of bias and it's tough to look past them. Another political development that may have the market concerned is the lead that Joe Biden has taken in recent polls. I don't think VP Biden himself is as much the concern as the indications that he is seriously considering Elizabeth Warren, if not as the Treasury Secretary, than at least as his economic advisor. CNN: Wall Street's nightmare: Elizabeth Warren as Treasury Secretary.

One of the clear positives for stocks is the Federal Reverse. Here's the S&P 500 vs. the Fed balance sheet in 2020. If the Fed steps in and adds liquidity, the market eats it up. It has flattened out recently so stocks flattened out, but this is clearly still elevated and that could make it tough for the bears to do a lot much damage.



One of the clear negatives for stocks is the recent rebound in Covid cases. Yes, testing is up and that will increase case counts, and of course the stock market is going to react, especially with the media back in 24/7 Covid mode. Ironically, the S&P 500 bottomed on March 23, well before cases peaked in April, so it may not be as easy as... cases rise, stocks fall. The market is looking further down the road than today's data.


Source: https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html


Death rates outside of Covid-19 are way down this year. Whether that is because many non-Covid deaths are being associated with Covid, or because people are wearing masks, or staying home, etc, I don't know. But lots of people die each year in the U.S., and that won't stop.

According to the CDC: https://www.cdc.gov/heartdisease/facts.htm

"One person dies every 37 seconds in the United States from cardiovascular disease.

"About 647,000 Americans die from heart disease each year—that’s 1 in every 4 deaths."

From cancer.com: https://www.cancer.gov/about-cancer/understanding/statistics

"In 2018, an estimated 609,640 people will die of cancer in the United States."

What makes the coronavirus different is that it is contagious, and with that comes uncertainty -- and fear, and fear can be used to keep us safe, but also as a tool or weapon to control our behaviors, and when those behaviors hurt the economy, the market will suffer.

The market is looking for news of a treatment or vaccine, even if it isn't imminent, to tell investors that this won't be a long term issue.

Looking forward the seasonality indicators get much better starting this week, although seasonality is rarely a primary indicator. However, early July is one of those times where it plays an important role.

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The S&P 500 (C-fund) lost 2.4% on Friday and that was enough to push it below the 200-day simple average (orange line) but it remains above the 50 and 200-day EMA's. There is a lot of support in that 2950 - 3000 area, but we did see a break below the bottom of that rising trading channel, which is a red flag. Volume was high on Wednesday and Friday and, as we mentioned above, that could have been the pension fund selling. That should be just about over, although Monday and Tuesday are still part of June and it could resume if they didn't didn't complete their transactions.




As pensions were theoretically selling stocks, they would have been buying bonds, which makes sense why the yield on the 10-year Treasury would have fallen. Yields fall when bond prices rise. But falling below that support line and back below 6.5% last week, is a little concerning.




The DWCPF (S-fund) is in the same situation as the S&P 500, and many other equity charts. We saw them fall below the rising channel, but are thus far holding above the key moving averages.




The dollar rallied last week, putting pressure on stocks, but Friday saw a bit of a negative reversal day after it neared the 200-day EMA and tested the top of what looks like a large bear flag. The stock market would likely prefer this to head back down from here.




A move down in the dollar would likely push gold to new highs - not that it would impact our TSP funds, but if oil, copper, lumber and gold are all rallying to new new highs, the stock market would likely follow along.




The BND (bond ETF / F-fund) was up sharply on Friday and as I have speculated, it could be product of the "sell stocks, buy bonds" rebalancing that we saw from the pension funds. If that's the case, we may see some backing off here this week - at least when we get into July.




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

Tom Crowley


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