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TSP Talk: Stocks take a breather after recent rally

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Stocks pulled back after the impressive 4-day rally. The Dow lost a modest 158-points, the S&P 500 dropped 0.63%, while the Nasdaq and small caps (S-fund) came away nearly unscathed on the day. Bonds rallied and the dollar was up giving the I-fund more than it can handle. The share prices and returns below reflect the two-day cumulative return from Monday and Tuesday because of the holiday on Monday.

Daily TSP Funds Return
Earnings season is here. Normally it's a time for profit taking, especially if the market was running up toward the reports. This year isn't exactly a normal October earnings period with the country and world recovering from the COVID economic crisis, and one of the most contentious elections just three weeks away. Can we expect a typical response?

Some major banks reported yesterday and they handily beat estimates, yet the bank stocks tanked on the day after the conference calls as the word seemed to be that earnings potential is limited going forward.

They set the tone for the day, along with some negative vaccine headlines. So, stocks dipped after a great run over the prior 4 trading days. They can't go up everyday. I am a little more worried about what may be hiding around the corner as far as the election goes, although so far the market doesn't seem concerned about any October surprises.

The internals were negative yesterday with the NYSE showing 2 to 1 declining issues to advancing, and volume was closer to 3 to 1 in favor of declining. The Nasdaq fared much better volume-wise after a mostly flat day for the index.

The Equal Weighted S&P 500 (same 500 stocks all weighted equally) was hit harder, losing 1% on the day, and also creating a failed breakout. It remains in that sharply ascending trading channel, which would break if today is another negative day. You can see that it has come a long way in the last three weeks and a little pause wouldn't be the worst thing for the market right now.

Tomorrow we get another weekly jobless claims number, which have weakened over the last few weeks, but the stock market hasn't seemed too worried about it. Perhaps bad news is good news as investors wait patiently for Washington to come up with a deal on stimulus. The worse the data, the more they may be forced to act.

The S&P 500 (C-fund) pulled back on Tuesday after the giant rally on Monday that seemed to come out of nowhere, except for the fact that the chart was trying to tell us that a breakout from the inverted head and shoulders pattern had an initial target price of 3525. It just happened so quickly and got all the way up to 3550 on Monday before closing down to 3512 yesterday, possibly eying that first open gap at the bottom of the rising trading channel.

The DWCPF (S-fund) held up rather well, closing near the break-even mark after lagging the large caps by quite a bit on Monday. There are a lot of little open gaps below that could be pullback targets, and the prior peak could be called upon to be a support level if we do get a pullback. But so far the rising trading channel remains intact so the run may not be over yet.

The EFA (I-fund) was down over 1% on Tuesday and Monday's attempt at a breakout failed. It's still in that rising trading channel and 65 looks to be the must hold support area, otherwise the 50-day EMA could get tested again.

The dollar was up sharply contributing to the I-fund's decline. To me it looks like a possible head and shoulders pattern in a downtrend, which generally means a break to the downside, but we'll see. If it does breakdown, a test of the September 1st low would be the target.

BND (F-fund) popped above the descending resistance line and the 50-day EMA, which is a short-term bullish sign, and there is some room above to roam, but the top of that range continues to be potential resistance.

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

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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