TSP Talk Blog

It was a mixed day on Wall Street Friday with the Dow and Transports up, the Nasdaq and small caps down, and the S&P 500 flat. Bonds were up and the dollar was down. The I fund was up sharply - partly because of a dip in the dollar, and more likely because the early gains in the U.S. market didn't disappear until after the overseas markets had already closed on Friday.

Daily TSP Funds Return [CENTER] More returns

For a second straight week we saw losses in the TSP stock funds, so September reminds us of its reputation as the worst month of the year for stocks. And here's the bad news, the seasonality chart suggests the worst part of the month is yet to come. Of course these are long term averages and anything can happen in any given year, but you can see in the chart that bulls may have some headwinds coming up, and perhaps this coming week will be their best chance at a relief rally.


Chart provided courtesy of www.sentimentrader.com

The economic data hasn't been all that bad as far as coming in near or better than expected, but because of COVID, the country is still dealing with recovering from a decimated economy because of the shutdowns. So far in September we've seen a few economically sensitive commodities fall sharply from their summer highs, and that could be a warning sign. The price of oil and lumber are in correction mode. Copper has held firm and is still near its recent highs.




The decline in commodities is partially a response to the rally in the dollar in September, and it seems to be at a crucial point as it tries to base and create a bottom. You can see below that the dollar's strength and weakness also impact the stock market as the S&P 500 (bottom indicator) has been moving counter the the dollar's direction.




After two negative weeks for stocks and many indices pulling back to test their first level of support, the bulls have a chance this week to buy the dip, something that many investors have avoided this year causing them to miss much of this incredible rally off the March lows. But the bear have also been waiting for their opportunity to catch the bulls flat-footed and start a more meaningful correction.

We have certainly been due for some kind of consolidation at best, but how long will it take for the dip buyers to pounce again? Will the folks waiting for a pullback be able to step up and take the plunge, or will they remain hidden and waiting for a bigger decline?

The AAII Investor Sentiment Survey certainly suggests that investors may have gotten too bearish. The gold bars represent the ratio of bulls to bears, and right now it is 0.49. That means there are more than 2 bears in this survey for every bull. That is extremely bearish, and being a contrarian indicator at extremes, that could be a bullish sign for stocks. Just follow what happened after prior sub 0.50 ratios.

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The S&P 500 (C-fund) opened higher on Friday, fell sharply midday, then came back to settle just slightly positive. That's a constructive hold at the 50-day EMA, but the longer it hangs around that 3325 area, the more emboldened the bears may get so the bulls need to step up this week if they don't want to see another leg lower. With one trendline (red dashed) and the 20-day EMA already broken, that's a couple of red flags, the support from the 50-day EMA and that old resistance line (solid red) becomes that much more important.




A closer look shows some other possible downside targets if the 50-day EMA breaks. I'm talking about those old open gaps. One gap (blue) did get filled recently, and one was partially filled (orange) on Friday, but there's another one that actually shows up on the daily, weekly, and monthly charts between the end of July and the start of August near 3280 (red.)




The DWCPF (S-fund) was down on Friday and it closed below the 50-day EMA. Technical analysis doesn't seem to be as critical on this chart since it is not the most highly traded index, but that open gap is certainly noticeable no matter how you look at it. Like the S&P 500 above, it looks like it is go time now for the bulls, or those open gaps will come into play.




The Dow Transportation has been one of the bright spots in recent weeks as it has not pulled back sharply like the other indices. As a matter of fact it has not even broken down from its rising trading channel like the other charts did a couple of weeks ago. Being a market leader and a very economically sensitive index, that's a pretty good sign - if it can continue to hold.




The EFA (I-fund) gained 1% on Friday but it is now up against the old resistance line again after the failed breakout earlier this month. It's still above the 50-day EMA and has not broken its support line of the recent lows. If the dollar rolls over again, this could be an interesting choice.




BND (F-fund) was up on Friday and it continues to cling to its 50-day EMA, closing above it for 4 straight days, but the chart formation looks suspect. One possible bear flag (blue) already broke down, and now it looks like a second small bear flag is forming.




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

Tom Crowley


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