TSP Talk Blog

Stocks we up on Friday erasing Wednesday's losses in the S&P 500, and in the case of the Nasdaq and small caps, just additional gains and new highs. The Dow gained 38-points so it lagged some and did not get back all of its 174-point loss from Wednesday. Bonds were up as yields fell, and the dollar fell to a multi-year low helping the I-fund add to its monster month.

Daily TSP Funds Return More returns

Take a look at the annual returns for the stock funds now, compared to the end of last month. Wow!



Of course this was heading into a contentious election after stocks slid during the second half of October leading into the election, so this November rally has got back that decline, and then some.



If you are a momentum trader, or a trend trader, you may be looking at this market as full steam ahead. The charts look good (although extended in some cases), the economy is improving, COVID vaccines are getting ready for release, new stimulus may be weeks or months away, and we're heading into a couple of the best months of the year historically, so what's to worry about?

If you are a market timer you can see red flags all over the place. Some indicators are extreme with some showing negative divergences, investor sentiment is extreme, and some charts have very little support underneath them.

December is a good month historically, the best of the year as far as how often it is positive, but as we saw in 2018, it isn't always good. Most of the positive action comes at the end of the month along with the typical early month pop that we see in almost every month, but the percentage of times positive isn't overwhelmingly positive - staying mostly in the 45% to 58% range from the 1st through the 18th (blue box.) The middle of the month is where we tend to see some perhaps repositioning where money managers are ditching their losers for their annual reports, then they buy some gainers toward the end of the year to pad those reports with the year's better performing stocks.


Chart provided courtesy of www.sentimentrader.com

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The S&P 500 (C-fund) was up slightly over the two days surrounding Thanksgiving, with a small loss on Wednesday, and a modest rally on Friday. Unlike the small caps fund chart down below, the S&P 500 had a couple of weeks of consolidation and could be on the verge of a break out. But it could also find continued resistance at the high on the 9th of November. That's more of an "F" flag than a bull flag, and F-flags aren't as bullish as bull flags because they do tend to breakdown, although the flag can extend for some time before it does.




The weekly chart of the S&P 500 reminds us just how stretched it is as it moves even further above the 200-day EMA than it was before the March crash. It's also up against some a couple of layers of longer term resistance going back years. While we have seen improvements in the economy, does this feel like an environment which would allow stocks to outperform similar troubled situations on the chart?




The DWCPF Index / S-fund was up sharply on Friday and it has gone virtually straight up for the last month with only 3 down days in the last 19 trading sessions. The trend is still the trend followers' friend here as it was able to break above resistance on the 16th, and so far that rising support line has held the whole time. How much longer? Usually longer than we think possible but sometimes those trends can end with a thud on the slightest bad news.




The Dow Transportation Index has also done well, signaling good things for the economy, but you can see it is also hitting the top of a long trading channel and even though we know the vaccine is just ahead, there were 195,000 new positive cases of COVID on Friday, which was a one day record. Yes, testing is through the roof and we will see a spike in cases, but once positive, we have to assume many of these people cannot / should not go to work.




The EFA / I-fund has benefited from the rally in U.S. stocks, and the global economic improvement, but the falling dollar caused by the money that was needed to help the COVID economy, has helped the I-fund particularly. But this chart looks a little top heavy, and with several large open gaps below, is it just a matter of time?




BND (F-fund) rallied on Friday and seems to have found support at the old resistance line. This may not be good news for the economy as it means yields are falling, and that tells us that the bond market may be anticipating more economic weakness, as the rising COVID cases might be telling us.




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

Tom Crowley


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